Travelzoo Inc. (NASDAQ: TZOO), a publisher of travel newsletters and websites, continues to quickly ramp up its Local Deals business, generating an estimated $2.1 million in net revenues in February, compared with estimated net revenues of $1.3 million in January, $1.5 million in December, $1 million in November, and $650,000 in October, Wedbush Securities said.

We believe the company is on track for further expansion of cities for Local Deals. The company added six cities during the month reaching a total of 35 (28 in U.S. and 7 international), and up from 23 from Q4. We believe Local Deals will be in 75 cities by the end of 2011, said Edward Woo, an analyst at Wedbush Securities.

Woo remains positive on the company as he believes the market opportunity for Local Deals is large despite competition. While Local Deals is still a small part of Travelzoo’s overall business, its growth prospects are very high.

Woo noted that there are 52 metro areas in the U.S. with a population of over one million so there is significant room for growth (from Travelzoo’s current 28 U.S. cities). Woo believes that the high quality and quantity (18 million) of Travelzoo subscribers should translate well into users of these local deals (entertainment, food, and services).

As local marketing is a fragmented and underdeveloped industry on the Internet, Woo believes Travelzoo is well positioned to enter this market.

Woo noted that the leading company in this space is Groupon, which has an estimated valuation (by various media and industry sources) of $5 billion to $15 billion, and is currently in about 200 U.S. cities (excluding international) providing only about 1,000 deals per day in the U.S., leaving out many small businesses that would benefit from this type of local advertising.

We believe past speculation by various media of Groupon potential acquisition for a reported $5 billion to $6 billion (which was reportedly turned down) or other local deals companies’ investments leads credence to the high potential value of Local Deals, said Woo.

Woo said that due to the current small size of Travelzoo’s Local Deals business, it is difficult to assign a comparable valuation metric though the absolute deal scenario values implies a high valuation.

The brokerage maintained its outperform rating on shares of Travelzoo with a price target of $55. The brokerage also maintained its 2011 EPS estimate of $1.05 and its 2012 estimate of $1.40.

Travelzoo shares were trading up 2.34 percent at $40.32 on the NASDAQ stock market at 10:32 am EST.

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