Online travel company TripAdvisor (NASDAQ: TRIP) has seen impressive growth over the course of the last 4 years. The company has taken advantage of the massive potential that lies in the market for online booking. Trip has also taken advantage of strategic and effective ad placement as click and display advertising revenues have been the core driver of the company's growth over the years. TripAdvisor has also been quick to hop on the bandwagon of consolidation across services in the online booking space with acquisitions of online restaurant reservation systems such as LaFourchette. TripAdvisor has expanded the range of its offerings and has added momentum to the company's competitive pressure on the likes of Priceline (NASDAQ: PCLN) and has strengthened its standing in the online booking space.
TripAdvisor's impressive FY 2014 performance has stimulated positive investor sentiment and is indicative of the company's long term growth prospects. TripAdvisor reported double digit top line and bottom line growth in FY 2014, driven mainly by display and click advertising revenues. The company's strategic portfolio expansion and adjustment has fared well for the company as it has allowed TripAdvisor to take advantage of prevalent market trends towards online transactions. The company witnessed increased web traffic and thus additional advertising revenues. The robustness of the company's growth in the face of headwinds in the international economy (Europe in particular) should serve as a fair indicator of TripAdvisor's growth prospects going forward.
Potential upsides for TripAdvisor
Revenues from Click and Display advertising account for almost 80% of TripAdvisor's total revenues. The company has seen increased web traffic across its online platform. The recovery of the US economy has benefitted the company as domestic traveling has increased. The numbers for business travelers as well as vacationers from the US are expected to increase further as the domestic economy continues to recover. Increased domestic travel volumes and increased demand for foreign travel by domestic consumers will drive further traffic towards TripAdvisor's websites and thus drive subscriptions as well as advertising revenues.
Taking into account an estimated doubling of web traffic over the course of the next 5 years and a predicted 87% contribution of click and display adverting, as well as average revenue growth for the last 4 years, I estimate TripAdvisor's revenues from click and display advertising to grow to almost $3 billion over the course of the next 5 years.
Since TripAdvisor's click and display advertising revenues are also major value drivers, there is definite upside potential for the company's share prices as well. Furthermore, TripAdvisor's consolidation efforts and strategic acquisitions, such as that of LaFourchette in the online booking space, are also set to add firepower to the company's portfolio and further intensify its competitive standing in the market.
Potential downsides for TripAdvisor, will they drag down long term growth?
The persistence of exchange rate headwinds over the course of the next couple of years at least could partially offset TripAdvisor's revenues growth. The Dollar has continued to appreciate against the Euro making travel expensive for TripAdvisor's European consumers. There could be a decline in travel bookings from European consumers as a result. However, TripAdvisor's acquisition of online reservation service LaFourchette could help offset the impact of exchange rate headwinds as it continues to take advantage of web traffic from Europe, which will now be more in terms of restaurant reservations. Moreover, exchange rate headwinds are also a relatively short term concern and TripAdvisor has adjusted its business portfolio accordingly in order to offset any potential downsides from the European region. TripAdvisor may also face potential downsides in the near term as a result of the fall in per click commission paid by Expedia Inc (NASDAQ: EXPE), as well as rising marketing costs for its new range of services which may drag down the company's EBITDA. However, this would only be a short term hit as TripAdvisor is expected to continue to grow in the years to come driven by its click and display ad revenues coupled with its diversified, more strengthened portfolio.
TripAdvisor has been riding a wave of momentum over the course of the last 4 years and its momentum has intensified over the course of FY 2014, during which the company generated double digit revenue as well as earnings growth. TripAdvisor's momentum is expected to continue in the years to come. The company does face headwinds in the short term mainly from adverse exchange rate trends affecting international operations but has done enough to offset any potential downsides. Investors can therefore look forward to long term growth. TripAdvisor has established itself as a major player in the market for online travel bookings and has expanded the horizon of its offerings through the purchase of restaurant reservation system LaFourchette, thereby diversifying its portfolio and allowing for greater investor value. I estimate a potential $93 target on the company's stock indicating an upside of just over 10% to current market price of almost $84. With share prices currently falling, now would be an ideal time to buy into TripAdvisor's stock.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.