TripAdvisor's $35 Valuation Threatened By Fake Review Concerns

Aug. 26, 2012 5:03 AM ETTripadvisor, Inc. (TRIP)7 Comments
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An increasing number of people have been turning to online travel websites for making a more informed travel decision. TripAdvisor (NASDAQ:TRIP) is one such platform that provides travel related reviews, aggregating around 75 million reviews and opinions about destinations, accommodations, restaurants and other activities. With close to 56 million unique monthly visitors, 32 million members and 22 million mobile application downloads, TripAdvisor's global community is growing strong.

However, lately, the authenticity of the reviews on TripAdvisor's website has once again come under scrutiny. TripAdvisor was even investigated by the Advertising Standards Agency (ASA) in September 2011 following growing criticism of its apparent failure to monitor fake comments posted on its website. As a result of the investigation, in February 2012, ASA banned the company from claiming or implying that the reviews on its website were from real travelers.

We estimate TripAdvisor to derive over 91% of its value from its advertising division. A substantial decline in the number of visitors on the company's website could have an impact on revenues earned through click-based and display-based advertising, thus leading to a decline in its stock value.

See our complete analysis for TripAdvisor's stock

TripAdvisor's founder and CEO, Stephen Kayfer, claims that the company has been dealing with the issue of fake review for over 10 years now, and thus has good expertise at catching people who are trying to spam the system. Additionally, according to a survey conducted by the company last year, around 98% of its audience trust the reviews on its website.

However, not many users seem to be satisfied with TripAdvisor's stance on fake reviews and feel that it is not taking any significant steps to curb them. Here, we try to analyze the potential impact of fake review on our current price estimate of $35.18 for TripAdvisor.

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