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The Trainline share price has come off the rails – here’s my move

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Train travelling through countryside
Image source: Getty Images.

The Trainline (LSE: TRN) share price lost 49% over the past year – with most of the fall this week. Could the fall in the Trainline share price be a buying opportunity for my portfolio?

Recent Trainline share price movement

Sometimes shares drift lower over months or years. By contrast, Trainline’s dropped like a stone on a single piece of news. The government released a review of train policy, including a proposal to set up its own ticketing platform. That could compete directly with Trainline.

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That threatens the company’s revenue and profits in the UK, its key market. Worried about that, analysts marked the shares down heavily. If the plans come to pass, I think it could hurt the company’s sales significantly.

But I think the reaction was overdone, for several reasons.

Mitigating factors

First, the idea is just a proposal right now. There is no concrete plan or timeline for it to be implemented. Nor does it have a precise shape. It might never come to pass. At this stage, the review is doing no more than floating a kite.

But even if it does pass, I think that it could actually be good for Trainline. The company has worked over two decades to set up its ticketing platform. Technically and commercially that is a huge task. If the government wants to do so from scratch, it may need to lean on Trainline’s expertise or simply buy the company outright.

Longer term concerns

Despite thinking the price plunge was over done, I still have concerns about Tranline. My main worry about the Trainline share price is nothing to do with the government review. Instead, I have concerns about its underlying business model. Even without a putative new competitor, those concerns remain.

Trainline basically acts as an agent for train companies. But a lot of them don’t need agents, as they can sell their own tickets. Moreover, its business model puts Trainline in what I see as an unattractive part of the value chain. During the pandemic, for example, the government was willing to spend billions of pounds in non-refundable subsidies to keep trains and buses running. But the government wouldn’t subsidise ticketing companies like Trainline, other than the standard measures offered to all businesses.

Meanwhile, revenues have cratered. Trainline’s interim results showed revenue down 74%. The loss per share widened from 17.7p to 19.1p. More alarmingly, operating free cash flow of £59m the prior year turned into cash outflow of £146m. The company has liquidity, but the cash outflow is another indicator to me that the business model lacks resilience.

My next move on the Trainline share price

Despite the fall in the Trainline share price, I won’t be taking the opportunity to buy into the company.

I don’t like the way the company’s fortunes are strongly tied to a host of factors outside its control. From government transport policy to passenger demand in post-pandemic working patterns, Trainline suffers financially from things it cannot control.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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