With another big consecutive quarterly earnings miss and the lack of clarity management provides for the future, the Street has finally lost patience in waiting for TripAdvisor's (NASDAQ:TRIP) Instant Booking (IB). The stock price has been down 18%, and forward EPS and price targets are also revised down. Many difficulties facing the company, such as slow shopper growth, monetization challenges with mobile and IB and rich valuation, have been discussed in my initiation article and the last quarter's update. As my theses are realized, I would advise to be even more cautious going forward. I believe that in the short to even medium term, the stock will be trading range-bound. The issues highlighted this quarter are persisting problems, and the management has not shown signs that they can tackle them effectively. Until the challenges outlined in "The Bad News" section below are resolved, a ceiling will cap the stock price. Similarly, I believe IB is the right strategy for the company in the long term as it can help Tripadvisor to close the monetization gap compared to competitors. In addition, hopes for a turnaround and/or M&A will maintain a floor for the price. Further pockets of optimism are discussed in "The Good News."
The Bad News
My previous bearishness on the stock centers on the following: 1) user growth slows; 2) commission charged compressed with IB and mobile; and 3) Growth IB brings is too optimistic. These themes undeniably played out in Q3 and will continue to pressure the stock in the following few quarters. Recall that TRIP aggressively rolled out IB worldwide in Q1 and Q2. As resources were taken away and spending in paid marketing channels was limited, traffic growth slowed to low single digits. Given that this past quarter marked the one-year anniversary of IB roll-out in US (Aug.) and UK (Sept.), we would expect to see hotel shopper growth ramp up significantly. However, hotel shopper growth is up only 3.4% in Q3 vs. 3% in Q2. Several major causes to such phenomenon include fierce competition, slow macro environment and smaller marketing spending. Management pledged to spend more on marketing in 2017, with the possibility to re-ramp TV spend to drive broader IB adoption. This will likely pressure margin, with uncertain effect on revenue growth.
Furthermore, growth momentum, mostly contributed from IB, will likely slow going forward. Much of the previous hype has been a result of aggressively adding supply to the platform. In previous articles, I have outlined that due to the construct of the hotel business, room for incremental supply growth is small. Being caught between limited supply and demand growth, TRIP could be in trouble.
Perhaps the biggest concern lies in mobile. TRIP's traffic was about 50% from desktop, 10% on tablets and 40% on smartphones. Of mobile traffic, about 50% was from the TRIP app and 50% from the mobile web. App traffic grew 50% y/y, off a small base. In previous quarters, management accounted that mobile monetization is 30% of desktop. With the same 30% mobile monetization rate, which the management confirmed, I estimated that revenue from desktop hotel shoppers is down 18%, not a good forward-looking indicator given that desktop still comprises ~80% of total revenues and mobile monetization remains at the same low point for quarters.
The Good News
Despite challenges, the road ahead for TRIP is not all dreary. I do think that in the long term, IB is the right strategy for the firm to differentiate itself from peers and grow the business. As management noted in the recent Phocuswright conference this month, TRIP wants to be something for all people, compared to Google (NASDAQ:GOOG) (NASDAQ:GOOGL) as a media site and Expedia (NASDAQ:EXPE) as a transaction site. Even with IB, management emphasized that traditional OTA transactions will continue to exist on the platform to cater customers who wants to find the best results.
Furthermore, IB offers incredible amount of convenience. Customers' credit cards are stored on the site so that they can come back and book something. Of TRIP's mobile app traffic (ie. 25% of total TRIP traffic), 20% of users rebook using a stored credit card (ie. 5% of total TRIP traffic). IB therefore allows TRIP to collect even more data which could potentially be powerful for the business. At the conference, TRIP subtly entertained the idea of doing more with their data, including the use of machine learning techniques. Adam Medros, SVP of Global Products, gave one example:
"We are already taking all of that content, that corpus of content that we have, and distilling out of it interesting bits about for example, for a restaurant, the dishes that are being served there, and mapping that to sort of common names for dishes, and being able to tell people when they walk in the restaurant -- people talk about X, or Y, or Z."
Needless to say, the success of IB is contingent on customers seeing its added value. The management is currently working on enhancing the user experience and will then put more effort on customer education, getting them to think about TRIP more as a booking site as opposed to just planning and researching. In more mature markets such as the US, revenue from IB desktop is already at parity with metasearch as conversions improve. According to the management, macro trends also appeared more favorable in September and continued in October. Therefore, investors may see positive surprises ahead.
Conclusion: Looking at both the negative and positive sides, I believe that in the short term, negative outcomes will continue to dominate. User growth, mobile monetization and brand image transformations are all difficult tasks to tackle. As rosy as the positive sides may seem, management does not seem to have a clear plan to deliver them. They also conceded that the IB transition has been longer and more painful than they have envisioned. I foresee the stock price trading range-bound in the near term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.