TripAdvisor's (TRIP) shares have underperformed the market significantly since July, with the price dropping around 24%, while the S&P 500 has increased ~4% during the same period. We believe this drop was mainly driven by monetization issues related to TripAdvisor's focus on improving traffic quality, Google Inc.'s (GOOG) acquisition of Frommers and the Q2 revenue miss. With the concerns already priced into the shares at the current price point, we believe that TripAdvisor offers attractive risk-reward prospects and rate it as a buy.
TripAdvisor has made recent changes to its website directed toward improving the experience of both consumers and advertisers. To this end, the company has reduced the number of pop-up windows for consumers and has increased the number of tools provided to advertisers. With TripAdvisor getting paid on a cost-per-click (CPC) basis, this will lead to revenue headwinds for TripAdvisor, as the click-through rates increase with the number of pop-up windows shown.
With the recent changes, we believe that from a consumer's perspective, the site will be much more user friendly, while Expedia, Inc. (EXPE) and priceline.com Incorporated (PCLN) - the two main advertisers on the TripAdvisor site - will get higher quality leads generated through the site. While this might result in short-term revenue headwinds for TripAdvisor, as low quality traffic doesn't get converted into clicks, we believe that it will be a long-term positive for higher sustainability of the site.
We also believe that TripAdvisor can then charge higher CPCs from advertisers, as the book-to-look ratio increases with the thinning out of low quality traffic (traffic that doesn't convert). TripAdvisor has also reduced its SEM spend and reallocated it toward Social Media channels to improve the quality of the traffic on the site. We believe that over the long term, TripAdvisor's advertisers could pay premium ad dollars to convert high quality users from TripAdvisor's websites.
Another concern that investors face is an increase in the Google dis-intermediation risk with Google's recent acquisition of Frommers from John Wiley & Sons, Inc. (JW.A). Before this, Google had acquired Zagat to push Yelp (YELP) from its perch as well. As Google is continuously diversifying its target markets, the original players are also not sitting silent. While Yelp has done good work with its integration in Apple's (AAPL) iO6, TripAdvisor has been working to decrease its overall dependence on Google as a source of traffic.
According to ComScore, a market research agency, the percentage of traffic coming to TripAdvisor from Google has declined from around 36% to 28% over the past one-and-a-half years. We believe that this will help lift some of the investor concerns that Google can kill all the traffic to TripAdvisor, as it tries to gain traction with its own products. TripAdvisor with its 75 million reviews has a much bigger scale than Frommers. The MAUs for TripAdvisor is also far greater than Frommers, as 54 million unique users visited TripAdvisor in June, compared to 1.7 million that visited Frommers.
We believe that the stock has taken some excessive hits recently with overblown concerns, and an upside correction might well be in place. TripAdvisor's recent strategic decisions will provide value to customers as well as advertisers in the long term, and can result in increasing CPCs. While there may be a short-term ad dollar loss, the sustainability of the website will be maintained in the longer run with a user-friendly interface. This is a move akin to something that Amazon's Jeff Bezos would do with his philosophy of providing value to customers. Furthermore, with Google's dis-intermediation risk decreasing, there are not enough pot-shots to take at TripAdvisor.
We continue to believe that TripAdvisor should benefit from an increasing percentage of travel migrating online and high growth in normal travel markets, and therefore rate it as a buy.