My latest position is short TripAdvisor (NASDAQ:TRIP). Yes I'm once again going against a very "trendy" tech giant, but as with LinkedIn, I think I have some very good reasons to believe this is a great short at its current price.
I'm not going to copy and paste some general explanations about the company, as I assume most of you know what it is and the rest can simply check Tripadvisor.com, Wikipedia, or any other source the web offers.
What I am going to do is give a short overview of the company's business model, and current different revenue streams, which are currently divided to three groups in the company's financial statements:
- Click-Based Advertising Revenues - TripAdvisor's largest source of revenue, generally priced on a cost per click basis, and amounted to $500M, $588M and $696M during 2011, 2012 & 2013, respectively.
- Display-Based Advertising Revenues -more or less the most common revenue stream in the web industry, it is generally priced on a CPM basis (cost per thousand impressions). Revenue from this segment amounted to $86M, $94M and $119M during 2011, 2012 & 2013, respectively.
- Subscription Based, Transaction & Other Revenue - this segment represents the more "sophisticated" way TripAdivsor generates revenues. It includes:
- Business Listing - an advertising product offered to business owners who want their business' full details to appear on Trip's website.
- Transaction Revenues - consists of making hotel room nights available for booking on the company's transactional sites.
- Content licensing arrangement with third-party sites.
While Trip does not reveal the revenue distribution between each of those sub-segments, we know that as a whole they generated $51M, $81M and $130M in 2011, 2012 & 2013, respectively.
The table below presents growth rates of the different segments for the last couple of years, as well as comparable data from the Q1/2014 results.
So, it's pretty clear that Trip is basically growing at a somewhat steady pace of 20%-25% for the last couple of years, and mitigating its decline in click-based ad growth with an accelerated growth in display ads & the 3rd segment.
Growing 20%-25% for an extremely profitable company like Trip is far from bad, but what kind of revenue multiple should it imply?
Current Enterprise Value to LTM revenue multiple stands at 14.6, which means Trip's Market Cap is $14.5B. I'd argue that the inflated market cap / revenue multiple reflects a lot of hope in the aforementioned "Other revenue" segment, whose growth rates are above 50% and are actually on the rise recently.
This segment is indeed entitled to a higher revenue multiple than Trip's "traditional" revenue streams (click & display ads), but it currently accounts for such a low percentage of the company's total revenue that it would take 5 years at an astonishing 50% annual growth rate (while display & click revenue stands still) for it to equal 50% of the company's total revenue.
While this "3rd segment's" future growth rates are a mystery and might eventually turn out to be very high indeed, I think it's highly unlikely that Trip will be able to increase or even maintain the traditional display & click ads revenue in the future. Looking at the combined segment growth rates in the last five quarters, I think it's safe to say that the best-case-scenario for click & display ads' growth rates is to remain flat and hover around 20% in the near future.
Unlike a lot of other tech "high-flyers", TripAdvisor is extremely profitable, which also has a major part in its current market valuation. Now, this may be a good time to raise the fact that our current tech "mini-bubble" might be confusing sometimes, as we keep hearing why profitability doesn't matter at the rapid growth stage (i.e LinkedIn, Twitter, etc.), and yet investors seem to dig Trip Advisor's high profit margins.
I'm all for profitable companies and huge margins, and Trip really seems to have a great business model. But the DCFs that somehow try to justify its current valuation not only claim that EBITDA margins will remain the same, but actually increase even further towards the 50% area.
Judging from the businesses that I've actually seen before that lasted for more than a couple of years, I find it hard to believe EBITDA margins of around 50% are maintainable in any industry, and would love to hear some contradicting examples. Growing competition will surely demand more marketing expenses and working hands in the near future, and the historical trend shows pretty clearly that margins are actually eroding, not improving.
With net margin approaching a (still great) 20% rate, and revenue growth's best-case-scenario is to hover around 25% for a few more years before turning lower, I still think TripAdvisor is actually a very good company, but see no reason for it to trade above 20-25 times LTM net income, which implies a market cap of $4B-$5B, or about 28%-35% of its current market cap.