Tripadvisor: Viator Is Growing Rapidly, But The Financials Are Keeping Me Away
Summary
- Tripadvisor's financials show little signs of improvement, leading to a hold rating for the company.
- Viator, the company's tour and adventure marketplace, shows promising growth potential.
- Competition from companies like Airbnb and Expedia poses a threat to TripAdvisor's market share.
skynesher/E+ via Getty Images
Investment Thesis
After losing over 70% of its value in the last decade, I wanted to take a look at Tripadvisor's (NASDAQ:TRIP) financial situation and what kind of growth catalyst is the most promising to turn the ship around. In terms of catalysts, the company does have one very promising venture, however, the financials are showing no sign of turning around, which makes me assign the company a hold rating until we see substantial improvement.
Outlook
The company's share price has seen a devastating barreling down the hill for the last decade, losing around 77% of its value. Is there a saving grace for the company? Let's have a look at what could be a potential catalyst for further growth going forward.
Viator
This revenue segment seems to be the most promising out of TRIP's revenue segments, with growth of 168% y/y. This service is the world's largest marketplace for tours and adventures. Anyone who's got an adventure or a tour to offer can do so on this marketplace and will appear on Tripadvisor. As of the latest quarter, the revenue growth for Viator was 59% y/y, which is still very strong growth. I wouldn't be surprised if Viator takes over as the main revenue generator in the near future if it continues to grow at such a pace. As of Q2 '23, the segment is still not anywhere near making a profit as it is still negative on Adjusted EBITDA margins, which is a non-GAAP measure. These non-GAAP metrics usually show better numbers, so if it's still negative, then according to GAAP measures, it is very far from being profitable.
Competition
Many sites like Tripadvisor do exactly the same. So far, TRIP seems to be holding the top in terms of market share, however, other companies like Airbnb (ABNB) and Expedia (EXPE) might take more of the market share from TRIP if the company drops the ball in terms of innovation, and differentiation. I have been traveling recently after a long while and to be honest, I didn't use Tripadvisor, as I found Airbnb or just Google (GOOG) (GOOGL) in general to be more convenient. There have to be more people who prefer the alternatives to TRIP.
Financials
As of Q2 '23, TRIP had $1.1B in cash against $838m in long-term debt. This shouldn't affect the company's operations too much, however, I would like to see debt being paid off little by little as the interest coverage ratio has been at around 3.5x as of FY22, and during the unprofitable years of '20 and '21, EBIT was not able to cover interest expenses on debt which meant the company had to use its cash available to continue to operate and not default on the debt or get into more debt as the company has done. As of Q2 '23, the company's interest coverage ratio was barely 1.4x which means that EBIT could barely cover the interest on debt. It is even below what is considered a healthy coverage ratio of 2. I am more conservative, so I would like to see 5x coverage. The good thing is that the company has a ton of cash on hand so it should be able to cover the debt with no problem, therefore, it is at no risk of insolvency for now.
The company's current ratio is right where I like to see it, within what I call an efficient current ratio range, which is 1.5-2.0. This tells me the management is being somewhat efficient with the company's assets, however, the big pile of cash could be used for some growth initiatives a little bit more and bring the ratio down to around 1.8. The company has no problem paying off its short-term obligations and therefore has no liquidity issues.
Current Ratio (Author)
The company's ROA and ROE are showing a turnaround from the worst of the pandemic lows; however, these are still below my minimum of 5% for ROA and 10% for ROE. As of Q2 '23, these have not improved and only got worse because the company made a loss of $49m. Quarterly reports tend to fluctuate due to the seasonality of the business, so I'll take the figure with a grain of salt but it's not looking good.
ROA and ROE (Author)
The same story can be seen in the return on invested capital, which recovered substantially from the recent lows, however, it was still very low as of FY22 and the latest report is showing negative ROIC due to a loss-making provision for taxes of $78m. Again, it is not looking good in the near future, therefore a higher margin of safety is going to be required.
ROIC (Author)
Over the last decade, the company's revenue growth ended up being around 5% with a massive hit during the pandemic peak and a recent explosion in revenue growth of 49% in FY21 and 65% in FY22, which is outstanding growth. I don't think it's going to be sustainable for long because the world is back to normal now, so I would expect low-mid-single digits growth going forward after FY23 since the analysts are expecting around 17% growth y/y, which is quite a drop from the previous year.
Revenue Growth (Author)
In terms of margins, TRIP was slightly profitable at the end of FY22, and as I said earlier, the company is at a $49m loss already, which is much worse than the same quarter a year ago, when it saw a loss of $3m. I am expecting to see negative margins on GAAP measures for FY23, which is not what I would like to see.
Margins (Author)
Overall, there isn't much to like in financials. The company seems to be going through another difficult time and if Q2 '23 is any indication of that. It seemed like the company was starting to turn around, however, the latest quarter didn't confirm the turnaround, so I will have to wait for the next couple of quarters to get more information about where the company is heading.
Valuation
I will look at the company's 10-year CAGR and will anchor my future revenue growth at that similar number. As I said, the company managed to get a 5.2% CAGR over the last decade, so for my base case scenario, I went with a little more upbeat revenue potential and decided to go with a 7% CAGR. For my optimistic case, I went with an 11% CAGR, while for the conservative case, I went with a 5% CAGR.
In terms of margins, I decided to improve these slightly, so the company is going to make around $1.10 a share in FY23, which is very optimistic but is close to what the analysts are predicting, which seems to be based on non-GAAP metrics, but I'll amuse the idea. According to these assumptions, the company's net margins will go from around 1% in FY22 to around 12% by FY32.
Seeing that the company's financials are not the best and the turnaround may be delayed a little more, I decided to apply a 40% margin of safety to the intrinsic value calculation, which I believe is an appropriate discount given the optimistic revenue and EPS growth assumptions.
With that said, Tripadvisor's intrinsic value is $11 a share, which means that currently, the shares are trading at a 25% premium to their fair value.
Intrinsic Value (Author)
Closing Comments
The company's financials led me to apply a much higher margin of safety due to how risky the company is going forward. To be honest, $11 a share would still be too high in my opinion if the management doesn't manage to turn the company around in the next couple of years and prove that it can be profitable consistently. So, I am not going to be a buyer until I see some promise in the company's financials. The competitive advantage and the moat need to be rebuilt before I would consider the company as a long-term investment.
The company has a lot of competition in the space, which will continue to take market share from it unless it can differentiate itself somehow in the future. Viator has the potential to be the top revenue generator and moneymaker once it turns a profit, however, this may take a little longer.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (3)
