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Summary

  • Shares of TripAdvisor have risen nearly 150% over the past 2 years.
  • TripAdvisor accounts for more than 10% of all global traffic to travel websites.
  • Several catalysts exist, but fair value is approximately 15% lower from the current prices.

COMPANY OVERVIEW:

TripAdvisor Inc. (NASDAQ:TRIP) is an online travel company that provides customers across the world access to the reviews and opinions of millions of fellow travelers via its global online community. Through its branded websites, which include tripadvisor.com in the United States and localized versions of the website in 39 countries (including China under daodao.com), TRIP collects reviews and opinions about destinations, accommodations (hotels, B&Bs, specialty lodging, vacation rentals, etc.), restaurants and activities throughout the world. With over 260 million monthly unique visitors to its branded websites, TRIP features over 150 million reviews and opinions on more than 810,000 hotels and accommodations and approximately 600,000 vacation rentals, as well as more than 2.2 million restaurants and 420,000 attractions in 140,000 destinations across the globe. Further, more than just reviews, TripAdvisor's platform also enables consumers to book hotels, vacation rentals, airline tickets, vacation packages, destination services and cruises through its websites.

The company primarily generates revenue from the sale of advertising through click-based advertising (priced on a cost-per-click, or CPC, basis) and display-based advertising (priced on a cost per thousand impressions, or CPM, basis), which accounted for roughly 74% and 13% of total revenue, respectively in 2013. The remaining percentage of revenue is generated through a combination of subscription-based services, allowing users to book room nights on its transactional sites, and other revenue such as content licensing.

INDUSTRY AND COMPETITION:

The market for online travel services is intensely competitive, subject to the current macroeconomic environment and rapidly changing mostly due to technological shifts such as mobile. In general, TRIP faces competition for users, advertisers and travel reviews. Specifically, TRIP competes directly with other online travel websites, such as Expedia and Priceline and their subsidiaries (Trivago and Kayak, respectively), as well as Yelp. In addition, the travel review industry has grown increasingly competitive in recent years as social networking sites (Facebook, Twitter, etc.) and search engines (Google, Bing, Yahoo, Baidu, etc.) have expanded their reach while amassing travel-related resources, information and reviews.

Furthermore, TRIP also faces competition from hotel companies, airlines and rental car companies - many of whom have their own websites - which the company expects will increase over time, as these other companies may offer better rates, availability and/or additional features/amenities through their own reservation service. TripAdvisor also faces competition from travel agencies, wholesalers and travel operators, as well as operators of travel industry reservation databases, such as Galileo, Travelport, Amadeus and Sabre. Lastly, its vacation rental business also faces competition from several companies including, but not limited to, HomeAway and Airbnb.

Meanwhile, changing technology habits - primarily via mobile devices, such as smartphones and tablets - will increasingly play a role in the future as consumers conduct travel research and planning using those devices. As such, the company plans to continue to invest in this and other areas of growth going forward. By way of example, as of the end of Q1 2014, aggregate downloads of the company's TripAdvisor, City Guides, SeatGuru, Jetsetter and GateGuru mobile apps reached more than 100 million, with average monthly unique visitors via smartphone and tablet devices growing 83% year-over-year (YoY) from 62 million to 115 million.

Additionally, TripAdvisor and the health of the worldwide travel industry as a whole are affected by the overall state of the global economy. During economic downturns - as witnessed during the Great Recession - travel expenditures were adversely impacted. As a result, any similar economic downturns in the future could lead to a reduction in business and personal travel. Further, given TripAdvisor's global presence, some areas may be more affected than others (i.e. the recovery in Europe has lagged the recovery in the US).

FINANCIALS:

TripAdvisor has experienced favorable financial results over the last several years, helped by a recovering global economy in a growing industry fueled by increasing global demand. On average, the company has grown revenue 26.2% annually over the last five years, driven by gains in each of its product segments (click-based advertising, display-based advertising and subscription, transaction and other). Although the percentage of revenue derived from click-based advertising has slightly decreased over the last three years, it still accounted for the majority of total revenue at 73.7% in 2013 (as well as in Q1 2014). Over the same time period, display-based advertising has hovered near 13%, while subscription, transaction and other has increased from 8% in 2011 to about 14% in 2013.

The company has identified two main drivers of its click-based advertising revenue - growth in monthly unique hotel shoppers (a sub-segment of total traffic growth) and revenue per hotel shopper (how effective TRIP is in monetizing hotel shoppers). For the year ended December 31, 2013, the number of hotel shoppers increased 36% YoY, compared to an increase of 32% YoY for the year ended December 31, 2012. Meanwhile, revenue per hotel shopper decreased 13% YoY for the year ended December 31, 2013 compared to a decrease of 8% YoY as of December 31, 2012.

Furthermore, in the three months ending March 31, 2014, the number of hotel shoppers increased 14%, while revenue per hotel shopper increased 1%. The company did point out a couple of factors influencing the somewhat weak YoY comparisons in the Q1 2014 and Q1 2013 numbers. Specifically, the company cited high hotel shopper growth from search engine optimization (SEO) in late 2012 and Q1 2013 as the reason for the deceleration to only 14% in Q1 2014, as well as the implementation of hotel metasearch in June 2013 (additional details below), which has resulted in higher CPC pricing due to higher-quality clicks (with regard to revenue per hotel shopper).

Among display-based advertising, the growth in the number of impressions (i.e. how many times an ad is displayed on its site) and the cost per thousand impressions ("CPM") are the two main drivers of revenue in this segment. For the year ended December 31, 2013, the number of impressions sold increased 34% YoY vs. a 6% YoY gain for the year ended December 31, 2012. Meanwhile, pricing decreased 5% YoY as of December 31, 2013 vs. a 1% increase YoY for the year ended December 31, 2012. In addition, for the three months ended March 31, 2014, the number of impressions sold increased 30% while pricing decreased 1%.

However, amid the company's growth in revenue, margins - primarily operating and EBITDA margins - have declined for the past four years due to a variety of factors. For example, cost of revenue increased primarily due to increased data center costs driven by higher site traffic, as well as increased merchant credit card fees from additional costs related to TRIP's business acquisitions in 2013. Additionally, direct selling and marketing costs have increased mainly due to increased search engine marketing costs and other advertising costs (i.e. offline advertising). Personnel and overhead costs have also increased over the years, fueled by an increasing headcount related to the company's international expansion and from recent business acquisitions. Further, costs related to technology improvements have increased recently as well, in an effort to enhance site features and extend the company's presence on smartphone and tablet platforms.

201320122011201020092008AVG
Gross Margin98.1%98.4%98.3%98.4%98.9%99.3%98.6%
Operating Margin31.2%38.8%42.9%46.6%47.7%41.9%41.5%
EBITDA Margin34.9%41.8%46.8%52.4%54.3%47.3%46.2%

In addition, despite the fact that TRIP competes with Expedia, the company does derive a substantial portion of its revenue via a partnership with Expedia. In fact, TRIP received 23% of its total revenue from Expedia in 2013. However, that amount is down from almost 40% in 2009, when it was still owned by Expedia.

Moreover, in looking at TRIP's revenue breakdown by geographic location, it appears as though the biggest increases in revenue (by percentage) have occurred in the Asia-Pacific and Latin America regions, while the North America and Europe, Middle East and Africa (EMEA) regions have both accounted for a smaller percentage of overall revenue. Although this will inevitably increase the company's foreign currency risk, these higher-growth regions should help drive revenue growth and customer engagement going forward.

Revenue by Geographic Region (in millions)201320132012201220112011
North America$49452.3%$40953.6%$36056.5
Europe, Middle East & Africa (EMEA)$29130.8%$24031.5%$21834.2%
Asia-Pacific$12212.9%$8210.7%$467.2%
Latin America$384.0%$324.2%$132.0%
Total$945100.0%$763100.0%$637100.0%

Source: TRIP Form 10-K, 31 December 2013

Meanwhile, the company exhibits a strong balance sheet, with little debt and a sufficient (and growing) cash position. As of March 31, 2014, TRIP had approximately $745 million in cash, cash equivalents and marketable securities - an increase of roughly 11% YoY - of which $319 million was held in cash and money market funds. In addition, the company has posted positive and increasing free cash flow (FCF) for the last five years at an average rate of about 27%.

VALUATION AND RECOMMENDATION:

Using an FCF-based DCF model based on the assumptions below, I estimate shares of TRIP are worth approximately $94.17. At their current price around $110, that represents a nearly 15% premium to my one-year price target, and serves as the basis for my HOLD recommendation. Considering the model's sensitivity to the inputs - specifically the terminal FCF growth rate - I have included a sensitivity analysis below. Even when using an 8% terminal FCF growth rate, it only results in a valuation of $116.49 - roughly a 5% gain from current prices. In addition, the FCF growth rate used in years 1-3 is based on the company's five-year average return on equity (ROE), while the 16% growth rate used in years 4 and 5 represent a 50% decline, assuming increasing costs and competition.

Assumptions:
Current FCF ($ millions)294
Shares Outstanding (millions)142.65
FCF Growth Years 1-332.5%
FCF Growth Years 4-516.0%
Terminal FCF Growth (Year 6 and after)6.0%
WACC12.94%
Price Per Share$94.17

Sensitivity Analysis

WACC

Terminal FCF Growth11.5%12.00%12.50%12.94%13.50%14.00%
4.0%$94.29$89.61$85.46$82.19$78.45$75.46
5.0%$102.42$96.49$91.35$87.35$82.84$79.28
6.0%$113.68$105.84$99.20$94.17$88.53$84.19
7.0%$130.14$119.11$110.07$103.36$96.12$90.62
8.0%$156.25$139.22$125.96$116.49$106.62$99.34
9.0%$203.57$173.01$151.16$136.50$121.96$111.72

VALUATION METRICS RELATIVE TO PEERS:

Also contributing to my HOLD recommendation is the fact that shares of TRIP appear overvalued on a variety of valuation metrics when compared to its peers and its industry (internet information providers). Currently, shares of TRIP are trading at a P/E of 76, a P/S ratio of 15.5, a P/B ratio of 16.3 and a whopping 48.5 EV/EBITDA ratio.

RISKS TO RECOMMENDATION:

At current levels, shares of TRIP appear priced for perfection, given their lofty valuation metrics and nearly 15% departure from fair value. While the company is executing well on most fronts, its place within a cyclical industry facing increasing competition could keep its shares in check in the short term. The company has already experienced increasing costs associated with additional marketing and offline advertising, in an effort to stave off competition. Also, increased costs associated with growing its mobile offerings via smartphones and tablets will continue to impact the company as the shift towards mobile intensifies. As a result of these increased costs, the declining margins the company has experienced recently - particularly in operating and EBITDA margins - are expected to continue, likely hurting the bottom line. Further, as competition intensifies, the company is subject to declining page views, which would likely translate into lower advertising revenue.

CATALYSTS:

Although shares appear overvalued for the time being, given the nearly 40% rise in the company's stock since the beginning of this year, there are a few catalysts that could push shares higher in the future. For example, the company announced that during Q4 2013, its transition to metasearch (aggregating search engine and database information so travelers can find the best deals in one place) achieved revenue neutrality - the point at which the new product (i.e. metasearch) generates revenue at the same level the previous model did. Initially, the transition to metasearch resulted in fewer clicks, thus generating less click-based advertising revenue. However, now with metasearch, these clicks are higher-quality as more bookings are done by users, enabling the company to raise its per-click ad rates, and ultimately increasing its total revenue.

In addition, TRIP is likely to see future growth as the company continues to expand its user base and increase its subscription, transaction and other business lines through its recent acquisitions, which included a total of seven over the last 18 months. Among its biggest purchases over that time was of European restaurant service La Fourchette for $140 million in May 2014, which will give TRIP access to 24,000 restaurant partners in Europe. La Fourchette ("The Fork") is the leading online and mobile reservation platform for restaurants in France and Spain, and turned profitable last year. In a move that actually preceded PCLN's purchase of OpenTable, TRIP's purchase of La Fourchette will enable the company to expand further into the international market, where there is more growth potential in the online restaurant reservation category. For example, while approximately 20% of existing restaurant reservations in the US are made online, that number is in the single digits in the international market.

Moreover, the company's six other acquisitions made in 2013, which totaled roughly $35 million, include a variety of services, all meant to help fuel future growth. These acquisitions include TinyPost (a photo app that allows users to embed text over photos and turn them into stories); Jetsetter (a members-only private sale site for hotel bookings); CruiseWise (a cruise research and planning site); Niumba (a Spain-based vacation rental site); GateGuru (a mobile app with flight and airport information from around the world); and Oyster (a hotel review website with expert reviews and hotel photos from over 150 cities worldwide).

Furthermore, as the use of smartphones and tablets continues to increase - particularly in international and emerging markets - the company is looking to capitalize on the increasing demand for mobile travel booking. As such, TRIP recently announced that it will offer instant booking on its mobile app and the mobile version of its website, in an effort to grow its user base and increase its conversion rates.

Lastly, the company's $250 million share repurchase program - announced in February 2013 - could provide an additional lift to shares in the future, as the company still has approximately $105 million remaining under this program with no expiration date.

BOTTOM LINE:

In yet another example of a spin-off outperforming its parent, TripAdvisor has enjoyed enormous success since splitting off from Expedia in December 2011. Although shares currently appear overvalued, the management team has proven it is more than capable and continues to focus on increasing its total user base through international expansion and improvement in its mobile offerings. Increasing competition and its lofty valuation, however, will likely keep shares in check in the near term, until the catalysts discussed materialize further. As such, I maintain a HOLD rating and a one-year price target of $94.17.

Source: At Current Levels, Shares Of TripAdvisor Are Priced For Perfection