- TripAdvisor's revenue growth is healthy with thinning profit margins
- TripAdvisor's 2014 focus will shift from meta-search to booking on mobile
- TripAdvisor is a great company at a very high price
Tripadvisor’s (NASDAQ:TRIP) stock has risen nearly 15% since our last coverage of the stock in Feb 2014. We think it’s getting a little too expensive as better options exist. We look at its financial performance, its much talked about meta-search platform and its current valuations.
Key Performance Metrics
Revenue and User related metrics
TRIP’s performance in Q4 2013 was better than expected, beating revenue estimates and matching EPS (adjusted) estimates. The company’s revenue grew at 26% over Q4 2012 (Y/Y) on the back of growth across segments, ‘click advertising’, ‘display advertising’ and ‘subscription, transactions and others’.
TRIP saw continued growth in traffic and content. Traffic grew to over 2 billion unique visitors in the year translating to a 36% increase in hotel shoppers, led by the US and UK. Subscription based listings grew 38% in the year and total listings grew by over 80%. Mobile traffic doubled to 40% of total traffic, an encouraging development that will improve user related metrics.
Growth remained healthy on all fronts in FY 2013 and TRIP expects the FY 2014 revenue growth rate to be in the ‘mid 20s’, similar to that of FY 2013.
TripAdvisor recorded its lowest profit margins ever, partly due to the transition to its meta-search platform and largely due to spends on TV advertising. Operating profit and net profit margins nearly halved to 13.4% and 9.5% respectively. Going by the Q4 con-call, one should expect TV ad spends to recur in FY 2014, especially towards the back-end of the year. However, profit margins are a consequence of choice, and should not be a cause for excessive concern.
Tripadvisor’s Meta-Search platform
In 2013 TRIP launched its meta-search platform which collates booking and availability information from various advertisers’ websites. It allows the user to search and compare options on the TRIP website until the final stage of booking when the user is directed to the advertiser’s website. Prior to this platform, visitors would have to click on ads and land on advertisers’ sites to find relevant information.
- The risk: Users were likely to click on ads less frequently, potentially dragging click based revenue, TRIP’s largest source of revenue simultaneously hampering advertiser ROI, an even bigger long term threat. Further, costs pertaining to the platform could squeeze profit margins.
- The opportunity: While extended retention of the user on their own site improves user monetization potential for TripAdvisor, it provides added convenience to the user. Further, when charged on a cost-per-click (CPC) basis, advertisers ROIs improve with better conversion rates per click (cost), since clicks now divert users who are more likely to transact.
- The Result: Q4 2013 saw the threat of a back-fire dissipate as the platform managed to break even sooner than expected. Additionally, the platform catalysed an increase in the number of bidders and higher CPC due to increased competition among bidders.
Key Drivers of Future Growth
While meta-search was the focus of 2013, in FY 2014 TRIP will focus on ‘assisted booking’ or mobile bookings that can be completed on the TripAdvisor site/app. The aim is to make the booking process more convenient for the user while boosting conversion rates for advertisers and revenue for TripAdvisor. With TRIP’s growing tribe of mobile users getting a boost from its apps being pre-loaded on Samsung smart-phones, this could turn out to be a great move.
For a company that earns revenue from ads, advertiser ROI is the name of the game. In addition to meta-search, the company also rolled our ‘Delayed Ad Call’ to improve the ROIs on their display ads. Ads placed at the bottom of a page now get monetized only when a user scrolls down and is able to view them, marking the move from impressions ‘served’ to impressions ‘viewable’.
TRIP will roll out its offerings in 8 new locations in 2014. While it has been heavily dependent on the US and UK for its revenue (81% in Q4 2013), the contribution from Asia Pacific (APAC) has nearly quadrupled since the end of FY 2010. To leverage its foot in the door, TRIP has broadened its suite of China focused products to tap into the country with the largest outbound travel expenditures. China’s online travel industry is growing at about 22% annually and has the likes of Baidu vying for a piece of the pie.
Tripadvisor is a great business that is doing everything to prove that it is here for the long haul. We think the company has great potential, but it’s expensive at current valuations.
Priceline (NASDAQ:PCLN), despite its larger revenue base has growth rates and profit margins that are much higher than those of TripAdvisor’s. With its recent acquisition of Kayak.com, Priceline gives investors exposure to a meta-search engine, albeit much smaller than TRIP, in addition to an OTA (online travel agent). We think Priceline is a better investment option.
|Price/Share (in $)||1,266.6||76.0||95.2|
Valuing TRIP using Priceline’s P/E and P/S multiple indicates that TRIP should be priced at $50 - $65 a share. We love the company, but not at its current price.
To see TripAdvisor’s latest stock price movement, click here (NASDAQ:TRIP)