TRIPADVISOR INC TRIP
July 10, 2012 - 8:55pm EST by
zbeex
2012 2013
Price: 44.76 EPS $1.68 $2.48
Shares Out. (in M): 134 P/E 18.1x 13.4x
Market Cap (in $M): 6,007 P/FCF 22.7x 16.3x
Net Debt (in $M): 206 EBIT 347 510
TEV ($): 6,213 TEV/EBIT 17.8x 12.2x

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Description

TRIPADVISOR (NASDAQ:TRIP): LONG

TripAdvisor clicks its way through another revenue and earnings beat! 

Summary Financials - Base Case:

Currency: $m except per share data June12A   Summary Financials FY09A FY10A FY11A FY12E FY13E FY14E
Current Price $   44.76   Revenues 352.1 484.6 637.1 817.0 1,051.9 1,300.2
Shares Outstanding 134.2     Growth % 18.1% 37.6% 31.5% 28.3% 28.8% 23.6%
Market Capitalization 6,006.8   Street Revenue  n/a   n/a   n/a  772.7 920.2 1,057.4
- Cash & Cash Equivalents 208.6   EBIT 168.2 226.3 279.7 347.2 510.2 695.6
+ Total Debt 414.6     Margin % 47.8% 46.7% 43.9% 42.5% 48.5% 53.5%
+ Pref. Equity  -    EBITDA 191.3 253.8 305.6 377.5 547.0 738.5
+ Total Minority Interest  -      Margin % 54.3% 52.4% 48.0% 46.2% 52.0% 56.8%
= Total Enterprise Value (TEV) 6,212.8   EPS  $   0.77  $   1.03  $   1.31  $   1.68  $   2.48  $   3.35
Book Value of Common Equity 354.7   Street EPS  n/a   n/a   n/a   $  1.33  $  1.65  $  1.85
+ Pref. Equity  -    EV / EBITDA  n/a   n/a  20.3 16.5 11.4 8.4
+ Total Minority Interest  -    EV / Free Cash Flow  n/a   n/a  31.6 23.5 16.9 12.5
+ Total Debt 414.6   P/E n/a  n/a  34.1 26.7 18.1 13.4
= Total Capital 769.3   P/E less Cash n/a  n/a  35.5 26.6 17.0 11.5
 

Business Overview:

TripAdvisor (TRIP) is an online travel research company that helps 50 million monthly unique visitors plan trips by learning from ~60 million customer reviews on 570 thousand business listings.  TRIP makes money primarily by generating leads for online travel agents (“OTAs”) (Expedia, Priceline, Orbitz etc), hotels, airlines and similar companies in the hospitality industry.  Customers pay TRIP on a:  (i) cost per click (CPC) basis (79% of revenues), (ii) cost per thousand impressions (CPM) basis (13% of revenues), and (iv) subscription basis (8% of revenues).  OTA’s generate ~50% of TRIP’s revenues.

Investment Thesis:

TRIP is a LONG because:

  • 60 million reviews developed over the past twelve years growing at 40 reviews per minute serving 50 million monthly unique visitors growing at ~40% YoY have created a strong moat with momentum around the business.  Furthermore, management’s long-term focus, prioritizing user engagement and experience over short-term financial benefits, is likely to widen this moat and lead to better monetization per user over the long-run.
  • TRIP has a long runway for growth with a ~$2.4B total addressable market given the secular growth in and the accelerating adoption of online marketing channels in the travel industry
  • Consensus underestimates revenue growth and operating leverage in the business.  With revenue growth of ~100% driving EPS growth of 155% by 2014, TRIP is trading at 11.5x our 2014E EPS less cash indicating ~2x of upside!

How this plays out:

  • Continued investments in the business will drive strong user adoption and engagement leading to continued growth in hotel shoppers and improving monetization.  This will cause revenues to compound over ~25%, and as operating leverage kicks in, operating margins will expand from 43.9% in 2011 to 53.5% in 2014.  As such, TRIP will generate $3.35 in 2014E EPS vs. consensus expectations of $1.85.  The resulting revenue and earnings beats will cause multiples to expand.

The bear thesis:

  • Competition from Google:  Google is a major source of traffic for TRIP and is promoting Google’s Travel products (Local, Places, Maps, and Hotel Finder etc.) which could cause declines in traffic at TRIP
  • Competition from OTAs:  OTAs represent close to 50% of TRIPs revenues and are building their database of customer reviews which could weaken TRIP’s competitive position and pricing power

Our view:

  • The evidence does not support the bear thesis: comScore data indicates and advertisers confirm that competition from Google and the OTAs has had no impact on TripAdvisor’s traffic and ROIs.  Monthly unique visitors on TRIP are growing at ~40% YTD while maintaining steady engagement per user.  In addition, advertisers state that ROIs on ad spend on TRIP are equally as compelling as those on Google.  As such, advertisers consider TRIP a critical source of traffic for them.
  • CPCs and overall online travel ad spend are expected to rise: Advertisers and their agencies indicate that steady and growing ROIs on ad spend combined with intense competition among OTAs and hotel/airline suppliers for customers is causing online advertising spend and CPCs on Google and TripAdvisor to rise.  Specifically, mature advertisers indicate that the proportion of their total ad budget allocated online has grown from ~30% two years ago to ~40% today and is expected to grow to ~50% by 2013 and closer to ~60% over the long-term. This compares to an estimated ~6% on average of total travel related advertising that is today allocated online across the industry.
  • Differentiated User Experience:  While the OTAs and recently Google through HotelFinder provide customers the ability to make reservations once they know where they are going, how they want to get there and what they want to do while they are there, TripAdvisor is designed to help travelers decide.  As such, TripAdvisor offers a unique user experience relative to Google and the OTAs and is a “must see” website for prospective travelers. Advertisers and even folks at Google believe that vertical search engines like TripAdvisor complement horizontal search engines like Google in providing the user with a more tailored experience.  As such, Google and OTAs are unlikely to displace TRIP in the foreseeable future.
  • Scale and an engaged user base provide a strong moat:  TRIP has ~60 million reviews on 570 thousand listings developed over the past twelve years and its review database is growing at 40 reviews per minute.  In addition, TripAdvisor today offers over 120 million Facebook users a personalized and social travel planning experience by enabling travelers to engage with their Facebook friends’ reviews and opinions when planning their perfect trip on TripAdvisor.  Combined, this enables TRIP to generate a significant amount of organic traffic through Search and Facebook and build a community around its content, thus further strengthening its moat.
  • Large Market with Low Penetration:  TripAdvisor accounts for less 2% of the estimated $39 billion spent on travel related advertising in 2011.  Furthermore, the online travel advertising market is benefiting from three secular trends:  (i) increasing internet adoption globally given that only 33% of the world population accessed the internet in 2011 (ii) an increasing number of travel related businesses (especially outside the U.S.) are moving online, and (iii) online travel advertising spend is likely to grow from 6% of total travel related advertising in 2011 to match the proportion (40-50%) of total eCommerce spending that is related to travel. Combined, this gives TRIP a long runway for growth.
  • Consensus estimates are too low:  Consensus continues to underestimate revenue growth and operating leverage and is overestimating risks from competition which leaves significant room for upside on a probability weighted basis!  A combination of a growing user base, increases in pricing, incresaing penetration of their business listings offering, incremental margins of ~70% and returns on selling and marketing spend of 70-80% are likely to generate revenue growth of ~100% and EPS growth of 155% by 2014.

Sign-Posts:

  • “Intense competition [in the OTA industry] has… historically led to aggressive marketing spend by the travel suppliers and intermediaries... In 2011, our selling and marketing expense has been growing at rates faster than our revenue growth and we expect that to continue for at least the next several quarters…” – Expedia, 2/10/12
  • “We have seen, and expect to continue to see online advertising, which is our largest expense, increase as a percentage of gross profit. Furthermore, the priceline.com brand is obtaining an increasing share of its traffic through online advertising, a trend which we also expect to continue.” – Priceline, 2/27/12
  • Monthly unique visitors at TripAdvisor are growing at ~40% YTD as of May12 according to comScore.
  • “TRIP posted strong 1Q12 results as top- and bottom-line numbers beat, our and Street estimates, driven by upside from click-based advertising.” – Barclay’s, 5/2/2012

Pre-Mortem:

  • Poor management execution and macro headwinds

Timeline – Key Events:

  • Q212 Earnings Conference Call on July 24, 2012

Catalyst

Earnings
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