TRIPADVISOR INC TRIP S
May 02, 2012 - 11:32am EST by
cross310
2012 2013
Price: 43.00 EPS $1.40 $1.62
Shares Out. (in M): 137 P/E 30.8x 26.6x
Market Cap (in $M): 5,883 P/FCF 30.0x 25.9x
Net Debt (in $M): 206 EBIT 323 324
TEV ($): 6,089 TEV/EBIT 18.8x 16.2x
Borrow Cost: NA

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  • Online Advertising
  • Internet
  • Industry Disruption
  • Travel

Description

TripAdvisor (TRIP) – SHORT THESIS

Note: While TRIP's quarter was good, this was a company who was growing at 30% in Q4 and reset expectations TWO MONTHS AFTER THEIR ROADSHOW to 'mid/high teens' revenues growth - then 'beat' with 23% growth TWO MONTHS LATER! Like FB, its a decelerating growth story that is trading at a premium multiple. Numbers are moving up slightly on the quarter and there's little change to the profit upside. Additionally, lower taxes are helping by ~$0.05 on the bottom line, as well as the lower share count. Management sounds pretty JV, and was not very confident on pricing. To me, the 17% move seems nuts...but I think will serve as a good entry point.

Summary Thesis

  • Competition: TRIP is starting to see increasing competition in its core hotel review space
  • Customer Concentration: TRIP’s website traffic is heavily dependent on just 1-2 players (EXPE and likely PCLN)
  • Google ‘Hotel Finder’: Though early, Hotel Finder has the potential to disintermediate TRIP, just as GOOG/ITA has disrupted the airfare search business
  • EXPE Transition: Expedia is advertising less with TripAdvisor and launching its own verified reviews website
  • TRIP De-cluttering: TRIP is redesigning its websites and reducing the number of display ads – likely causing growth to slow
  • Margin Compression: New initiatives/investments in sales and marketing, China, mobile and other listings efforts will pressure near/medium-term margins
  • Limited mobile monetization opportunity
  • Valuation: TRIP’s stock seems priced for perfection

Industry Backdrop

Travel was one of the first industries to be disrupted by the Internet with big average purchases on goods/services with low marginal costs – similar to hotel rooms. Given these economics, online travel is not only very lucrative but also very competitive. As individual spend is quite high, websites tend to spend a lot of money to attract users – translating in high advertising rates and big windfalls should you be one of few winners.

TRIP was among the first websites to aggregate travel reviews and experienced significant growth while leveraging its relation with Expedia’s website and platform. TRIP's main source of revenue (80%) is a cost-per-click (CPC) model, while the balance comes from display ads and small amount of subscription-based services.

  • Consumers visit TRIP’s website to check out ‘quality’ reviews of hotel and travel destinations written by third-parties individuals
  • Consumers are then given the option to book the hotel through various online travel agencies (OTAs)
  • The OTA pays TRIP a pre-arranged amount every time the consumer clicks to be redirected to the OTA's website for further details on the hotel deal

Facebook Integration

  • TripAdvisor uses Facebook to find and connect with your friends as soon as you sign up (see screenshot below)
  • The site then uses information from your friends' profiles, such as restaurants and other businesses they have 'liked', to create a personalized city-specific social traveling experience
  • To figure out who you were and where you’ve traveled, TRIP bought the app firm ‘Where I’ve Been’ in July 2011
  • “TripAdvisor users who are also Facebook users are approximately 27% more engaged in TripAdvisor site usage and are twice as likely to contribute content that the average TripAdvisor user”

Investment Highlights

  • EXPE Dependence/Transition: Prior to spinning off TRIP, EXPE accounted for ~7% of TRIP’s website traffic and ~33% of TRIP’s revenues (2011) – making it the main OTA that advertised on TRIP’s sites
    • EXPE outbid the other OTAs for better ad placement by paying inflated CPC rates
    • As an EXPE subsidiary, whatever EXPE paid just flowed back to EXPE’s bottom line – and was the reason for TRIP’s ~50% EBITDA margins pre-spinoff
    • Post-spin, EXPE announced that it will be spending a lot less on TRIP's CPC advertising (the announced 1-year strategic TRIP/EXPE partnership seems more marketing fluff)
    • On TRIP’s Q4 call, management guided for margin compression (low 40s EBITDA margins) stemming from increased public company costs, increased marketing spend, higher headcount, and the loss of EXPE’s high-margin revenue
    • Separately, EXPE is slowly moving away from the TRIP partnership and towards their own competitive offering
  • Expedia ‘Verified Reviews’: On its Q4 call, EXPE also mentioned it would be focusing more on building out its own review database with validated reviews
    • ‘Verified Reviews’ will only have reviews from consumers who have stayed at a specific hotel AND booked it through an EXPE site
    • Both Orbitz (OWW) and Priceline (PCLN) have both mentioned they will be increasing investment in their own services platform to improve the customer experience (including their reviews and travel guides)
    • Orbitz and Yelp recently formed a partnership where can see hotel reviews via Yelp, then book directly through OWW – I believe this is more headline noise than anything else, especially on the back of YELP’s successful IPO
    • Both EXPE and OWW have given cautious 2012 outlooks, citing increasing competition (mostly air bookings)
    • Bottom Line: With increased customer-focused platform spending by the OTAs and pressure on OTA airline revenue make for a difficult backdrop – I find it unlikely that 3rd-party marketing on TRIP will be increasing
  • Google ‘Hotel Finder’: Just as GOOG transformed the airline search space (see ITA Software below), it has now been ramping up its hotel search offering – though to date, it seems more like an experiment
    • Hotel Finder essentially provides similar services to TRIP – displays all available hotels, lists proprietary hotel reviews, and compares room rates across various OTA and hotel sites
    • Hotel Finder also displays links to other review sites as well: expedia.com, bookings.com and even tripadvisor.com – not to mention Hotel Finder is typically at the top of GOOG’s search queue
    • Expect GOOG to roll out a more complete product integrated with its recently acquired Zagat’s review database
    • Bottom Line: Hotel Finder is still just an experiment of sorts, but could spell bad news for TRIP if GOOG is able to achieve a similar level of disruption as it did in the airline bookings space
  • Customer Concentration: TRIP’s growing monthly site traffic is incredibly valuable – OTAs pay to access this traffic, then re-direct it to their own websites in order to complete the booking
    • OTAs make up the large majority of TRIP's revenue with EXPE at ~33% of 2011 revenue, and another unnamed OTA (likely PCLN) at ~11% of 2011 revenue – for a total of ~44% of ’11 revs
    • GOOG comprises 23% of the traffic to TRIP sites – and happens to be the one potential competitor building up a content-rich presence in the vacation review/booking space (see above); EXPE is the second-largest source of TRIP traffic at ~7%
    • Bottom Line: TRIP sources roughly one-third of its global traffic through GOOG and EXPE – the two companies that are looking to cut ties to TRIP and launch their own unique scale offerings
  • China Growth Opportunity: TRIP has been spending/investing aggressively to build up its China presence – one of the last bastions of growth in the mature online travel industry
    • In Apr ’09, TRIP launched its China site daodao.com to initially translate some TRIP into Chinese, then build up reviews from Chinese members
    • In Jan ’11, TRIP sold a 30% stake in daodao.com to Tencent (700 HK)
    • In Oct ’09, TRIP acquired Kuxun.cn – China’s 2nd-largest consumer travel site and hotel/flight search engine with a 17% market share vs. 42% for market leader Qunar (BIDU)
    • By year-end 2012, TRIP expects to have ~220 employees in Beijing and expects to ‘invest heavily and operate at a loss’ in China
    • Given BIDU’s 70% search engine share and relationship with #1 Qunar, I believe keyword spend and additional investment in China may lead to continues losses over the medium-term
  • Limited Mobile Monetization: While TRIP has had over 13mm mobile app downloads, management has made a conscious decision not to monetize mobile fully today – this partially stems lower mobile monetization overall, and partially from less inventory/no pop-ups on TRIP mobile

Valuation

The online travel market is a relatively mature market and has a broad array of offerings (airlines bookings, hotel bookings, hotel reviews, discounted deals, etc.). This is evidence by its price/growth multiple of sub-1x PEG. However, TRIP at ~$43/sh trades at >30x P/E, ~19x EBITDA and ~1.5x PEG – making it fully-valued and ‘priced for perfection’ in my opinion; both PCLN and EXPE trade below 1.0x PEG.

Longer-term, I believe TRIP will benefit from the secular shift of travel booking and advertising online – which could serve to reaccelerate growth/earnings above 25-30% once again. However, to capture that growth – TRIP will need to re-invest in its business and other initiatives (international, mobile, subscription listings) which likely cause continued margin pressure and another reset in growth expectations.

GOOG/ITA: Canary In The Coalmine?

  • OTAs have been seeing competitive pressures on the airline bookings side is because of GOOG
  • GOOG acquired ITA Software in 2010, but it wasn't until 2011 that GOOG began transforming the airfare search environment
  • Instead of having to log onto various OTA websites to search for different airfares, you can simply do everything via Google
  • As a result, the OTAs have all been pushed down in the GOOG search queue, resulting in an inferior exposure to the consumer

 Takeout Risk: Biggest risk here is takeout risk...I could see GOOG making a knock-out bid for the company, but I doubt they would pay the valuation - though I have no edge here.

Catalyst

  • Earnings miss
  • Travel slowdown
  • Competition
  • Economic Downturn
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