TripAdvisor (NASDAQ:TRIP) reported earnings today, the stock was up 12.3%. The value of the put options for the portfolio did not move, we remain in the green.
Few things to note from the earnings call:
- Management says that they will not forecast revenue or adjusted (Non-GAAP) EBITDA anymore
- Management says hotel revenues (91% of total revenues) will be "muted" in 2016 and resume growth in 2017
- SG&A will keep growing faster than sales as they do what is right for the long-term of the business
I had mentioned this in a comment on Seeking Alpha, but not in my actual write-up before the earnings call. I'm going to pick out the parts that matter, but you're welcome to read the entire conversation here (slightly edited this for easy comprehension):
I'm saying that gross margins are falling because they are losing pricing power to customers, while they are still aggressively marketing! Profits per user keep falling, while costs per user keep rising! We're going to look at the revenue per hotel shopper metric which management says is what they use to measure how effectively they monetize hotel shoppers. TRIP has no control over this, Partners will always revise their bids, and these Cost Per Clicks (CPC) are going to trend lower over time because everyone is going to try to corner market share by charging lower prices. This ALWAYS happens in perfectly competitive industries. This is from FY 2014 10-K:
"CPC prices are determined in a bidding process that allows our partners to use our proprietary system to submit CPC bids to have their rates and availability listed on our site. When a partner submits a CPC bid they agree to pay the amount of that bid each time a user subsequently clicks on the URL link to the partner's website. Bids are submitted periodically - sometimes as often as daily or weekly"
Start with FY ending 2012:
"The primary driver of the increase in click-based advertising revenue was an increase in hotel shoppers during the year ended December 31, 2012, when compared to the same period for 2011, of 32%, partially offset by lower revenue per hotel shopper of 8% for the year ended December 31, 2012.. "
Then FY ending 2013: "Revenue per hotel shopper decreased 13% for the year ended December 31, 2013 .."
FY Ending 2014 (This increased because of hotel metasearch, which will be a one time benefit):
"Revenue per hotel shopper increased 7% for the year ended December 31, 2014 in comparison to 2013, and decreased 13% for the year ended December 31, 2013 in comparison to 2012, according to our log files. Revenue per hotel shopper increased 7% for the year ended December 31, 2014, largely due to our implementation of hotel metasearch completed in June of 2013, which has resulted in higher CPC pricing paid by our partners, due to higher quality clicks being delivered, offset by relatively lower rates of hotel shopper conversion."
FY 2015 Q1:
"Revenue per hotel shopper decreased 5% and increased 1% for the three months ended March 31, 2015 and 2014, respectively, according to our log files."
Take a look at 2015 Q2 and Q3, and you'll see the exact same thing. This number is not just decreasing because of the strong dollar (I agree that the value of the USD does affect them), it is decreasing, because the laws of economics say so! You cannot keep growing costs at a faster rate than revenues in these sort of industries, it's just not sustainable. There are already tons of competitors in china (Ctrip, Qunar merger), who will price them out. Every marketing $1 they spend in China will result in less than $1 in profits.
Those were excerpts from a comment I posted on seeking Alpha.
Expedia reported Q4/year-end earnings yesterday and I noted that "Revenue per (hotel) night fell 11%". Look back to Expedia's Q3, -15%, in Q2, -16%, in Q1, -13.6%. Expedia's management mentioned that only a portion of the decline was aided by the strong dollar. This is what really brought TripAdvisor's CPC growth to a screeching halt (it fell 1% for the quarter, CPC accounts for 60% and hotels account for 91% of Trip's revenues). Priceline and Expedia make up 46% of TripAdvisor's revenues.
This is the same phenomenon we see in retail where inventory is rising faster than sales (inventory turnover falling) which precedes the ensuing losses. The difference is that with retail, the losses move from the balance sheet to the income statement, where as we see the decline in the income statement directly in this case. They sell no tangible goods, so the sales and marketing expenses are equivalent to inventory.
Importantly, we anticipate that revenue per hotel shopper and therefore both click-based revenue growth and hotel segment growth rates will reaccelerate in the back half of the year as we start lapping the instant booking roll out in the U.S. and the UK and also meet easier Meta CPC pricing comps. Despite this reacceleration in the second half, we expect growth for the full year to be muted. - (Source: Seeking Alpha Transcripts)
They mentioned that Hotel growth is going to be "muted" for 2016 and will resume growth in 2017, even though the revenue per hotel shopper will grow as a result of the instant booking rollout. And once again, expenses will grow faster than revenues. How sustainable is this? For a new company, brand awareness is important and they will need to spend more $ on sales and marketing expenses. TripAdvisor has been around since 2000, already been in several countries. The reason why SG&A is growing faster than revenues is because the Revenue per hotel shopper is falling. Revenue per hotel shopper is falling because of the price wars coming from upstream (Expedia et al.), and it is only going to go lower in FY 2017 after the effects of the instant booking is worn-in.
They also said that they would no longer give revenue or profitability guidance; they basically covered all their bases, and the stock rose. Irrational exuberance's finest. The difference between Priceline, Expedia, and TripAdvisor is that Priceline and Expedia have P/E ratios of 21 and 17, while TripAdvisor sits at 40. The only way I see this short going wrong is if the company gets acquired by dumb money. Priceline owns Kayak, and Expedia actually spun-off TripAdvisor, so I don't necessarily see either of them acquiring the company. Nonetheless, the risk of acquisition is the only reason I'm not doubling down as there is a lot of dumb money floating around internet stocks. The puts will remain 1% of the portfolio. Puts are January 2018, $40. I short over the long term and not quarter/quarter for today's very reason.
Disclosure: I am/we are short TRIP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.