Spinoffs are a successful investment concept these days, from Carl Icahn pleading with eBay (NASDAQ:EBAY) to separate itself from its PayPal unit to Abbott Labs (NYSE:ABT) distancing itself from its once-dominant product, the rheumatoid arthritis medicine Humira, by spinning off its pharmaceutical business as AbbVie (NYSE:ABBV).
But few amicable divorces have been as fabulously rewarding for investors as the spinoff of TripAdvisor (NASDAQ:TRIP), the travel content site, from its one-time parent Expedia (NASDAQ:EXPE), the online ravel agency.
In some ways, TripAdvisor resembles Yelp (NYSE:YELP), with consumers logging some 125 million reviews of hotels, vacation rentals and other travel experiences on the site. Users make travel decisions based on the site's content and, when they click through to actual travel agencies like Expedia and Priceline (NASDAQ:PCLN), those companies pay TripAdvisor a fee. The travel agencies also buy banner ads on TripAdvisor. The clicks and banner ads - along with some subscription services - added up to total 2013 revenue of $944.7 million. And unlike Yelp, TripAdvisor is solidly profitable, with net income last year of $205.4 million.
The more people post reviews, the stronger the content, the more online travel agencies are compelled to buy click and banner ads.
But wait just a minute. TripAdvisor, after its rapid advance, commands a market cap of $13.2 billion. And it trades at a forward forward PE ratio of more than twice that of Priceline and Expedia.
TRIP PE Ratio (Forward) data by YCharts
Does that make any sense? Conceptually, here's one argument for a richer TripAdvisor multiple: it's a media company, essentially, and its enormous storehouse of reviews are valuable assets - and represent a moat to potential competitors entering the space. The company's sites attracted 260 million unique visitors monthly during 2013, an 11% market share in online travel. TripAdvisor calls itself the world's largest travel website.
While an elegant technical advance in online travel purchasing could supplant Priceline and Expedia, the disruptor would still likely need TripAdvisor to steer consumers toward its site; Priceline and Expedia together account for 47% of TripAdvisor's revenue.
It's a good argument, but far from a guarantee of sustainable competition advantage, at least to the extent of justifying paying 51 times forward earnings for TripAdvisor stock. What's more, Priceline's margins are widening as it grows, showing true economies of scale. TripAdvisor's margins suggest either a temporary need to invest heavily or a business that gets harder as it gets bigger.
TRIP Profit Margin (Quarterly) data by YCharts
TripAdvisor's sales and marketing costs as a percentage of revenue have been expanding - to 39% last year from 32.8% two years earlier. True, Expedia and Priceline are also having to spend more on search ads and other advertising to generate business, as the industry becomes more competitive. But Priceline stock seems attractive in particular because, as we wrote earlier, it operates more efficiently than competitors and its rate of growth has been especially impressive.
That doesn't mean TripAdvisor is a candidate to be shorted. Its revenue growth and strong market position have won it many fans, and betting against them could be ruinous.
TRIP Percent of Shares Outstanding Short data by YCharts
But in a market correction, a company like Priceline - trading at a more modest multiple, growing a bit faster and enjoying margin expansion - seems a better bet to hang onto its value.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.