TripAdvisor Earnings - Risky Valuations Continue Post Q2

  • TripAdvisor's revenue growth and future prospects look attractive.
  • Profit margin contraction is expected in the coming quarters.
  • TripAdvisor's valuations are likely to come under pressure, making it a risky bet.

TripAdvisor Valuations Still Too High Post Q2 2014

TripAdvisor’s (NASDAQ:TRIP) stock price corrected by about 11% on 24 July 2014, the day after it announced its Q2 earnings. The company delivered accelerated revenue growth for the quarter and looked well placed to beat its full year revenue guidance. However, investors were disappointed by the company’s near 10% miss on the Non-GAAP EPS estimates. TripAdvisor’s management also lowered its full year Adjusted EBIDTA projection. Even with the downward revision of the guidance on that front, TripAdvisor’s profitability remains healthy. However, a lot is built into the company’s lofty valuations making it vulnerable to further corrections. TripAdvisor is a great company, but the stock is a risky bet at these valuations.

TripAdvisor Q3 Earnings – Estimates vs Actuals

TripAdvisor’s revenue growth was in line with its full year guidance of ‘high 20s to low 30s’. One could say that the guidance roughly translates to 25-35% or a midpoint of 30%. The company’s revenue growth beat estimates marginally. However, the earnings miss was sizeable and triggered the big correction in TripAdvisor’s stock price.

Q214

Estimates

Actuals

Beat/Miss %

Revenue - $ million

322

323

0.3%

Adjusted EPS - $

0.61

0.55

-9.8%

TripAdvisor Revenue Growth

TripAdvisor’s revenue grew at an accelerated rate of 31% YoY, its highest in about 3 years. The faster growth was driven primarily by two segments, click based advertising and other revenue.

Segment

% of Revenue in Q2 2013

% of Revenue in Q2 2014

YoY Growth

Click Based Advertising

74%

73%

28%

Display Advertising

13%

11%

19%

Subscription, Transaction & Other

13%

16%

55%

The company’s click based advertising segment grew at 28% YoY in Q2 2014, up from 16% growth in Q2 2013. Higher shopper growth (up 3 percentage points sequentially to 17% YoY in Q2) and continued strong pricing of clicks on the meta search platform drove this segment.

The ‘subscription, transaction and other’ revenue segment grew the fastest albeit on a smaller base. The segment grew at 55% YoY partly due the acquisitions of ‘La Fourchette’ or ‘The Fork’, an European restaurant reservations site, and ‘Vacation Home Rentals’.

Geographically, Europe, Midde East & Africa (EMEA) was the fastest growing region with Year on Year (YoY) growth nearly doubling over its LTM average of 24%. Asia Pacific (APAC) was the other geography that grew at a fast clip.

% of Revenue

YoY Growth

North America

50%

20%

EMEA

33%

47%

APAC

13%

40%

LATAM

4%

30%

The company recently appointed Lily Cheng, formerly the head of DoaDoa (TripAdvisor China) as president of TripAdvisor’s APAC operations, with a focus on China, Japan and India. Here’s an interesting piece of commentary from that press release.

“Intra-APAC and APAC outbound travel to the rest of the world currently accounts for over one-third of the world's air passenger traffic volume, and over the next 15 years, more than 50 percent of the global growth in traffic volume is expected to come from APAC.“

TripAdvisor Profitability

The sore spot in TripAdvisor’s recent earnings release was profitability with adjusted EPS coming in lower than expected. However, Trip Advisor’s profitability remained at healthy levels clocking operating and net profit margins of 31% and 21% respectively.

In absolute terms the company’s profits were almost identical to those in Q1 2014. The difference in profit margins was the $10 million spend on TV advertising in Q2. Going by the company’s commentary, TV ad spends will ramp up in Q3, which is traditionally its best quarter in the year. The company plans to spend an additional $20 million on TV ads this year (all in Q3).

Revenue estimates for Q3 2014 expect revenue to come in at $348 million. Assuming that the additional ad spends will be incremental to the sales and marketing (S&M) expense in Q2, S&M expense is likely to spike to about 42% of revenue, if not more.

Based on the average cost levels over the last 4 quarters (LTM) for the rest of the cost heads, operating and net profit margins could come in at about 26% and 19%. Here we haven’t projected line items like ‘total other expenses’ and have used a tax rate of 28% as projected by TripAdvisor for the full year. It is likely that margins will come in lower than these projections based on the company’s growth focused commentary in the earnings con-call.

TripAdvisor Future Outlook

As we had mentioned in our TripAdvisor earnings preview, the company’s CPC pricing improved in Q2 2014 and its mobile focus seems to have impacted its user trends.

In Q2 2014, TripAdvisor saw monthly unique users grow by 25% YoY to 280 million. Nearly 50% of this was mobile traffic, up from 44% in Q1. TripAdvisor has added features like its mobile bookings platform Instant Bookings and offline features to engage and monetize mobile users.

The ‘Instant Bookings’ feature is now available to 100% of US mobile traffic and is due to be rolled out to desktop and tablet traffic in Q3 2014. As per TripAdvisor, the feature has been driving more hotel shopper conversions than meta-search, and so, availability across devices will be a positive. Further, the eventual roll out of the feature across geographies outside the US, will further aid conversion rates, and growth in the click based revenue segment.

Further, ‘instant bookings’ could have a favorable impact on the company’s cash flows. The management mentioned during the con-call that TripAdvisor collects payments from travellers in advance and passes on the same to hotels/property owners when the stay happens. This will result in TripAdvisor gaining access to higher cash flows intermittently, even though it will have to pay its partners eventually.

TripAdvisor’s acquisition of Viator, a resource for booking destination activities adds one more aspect of travel to the company’s suite of services. More importantly, this will also be complementary to its instant bookings feature and could aid monetization.

TripAdvisor Valuations

TripAdvisor registered improvements on most counts in its last earnings release. User growth, new features, acquisitions, strong revenue growth and decent profitability. The company also re-iterated its full year revenue growth guidance of ‘high 20s to low 30s’, which could be read 25-35% as a broad range.

What isn’t great news is that the company’s adjusted EBITDA guidance has gravitated towards the lower end of its full year projection of ‘high 20s’. Apart from steady revenue growth, TripAdvisor is also valued for its solid profitability, a rarity in the internet businesses space. One will have to wait and watch exactly how low margins will go from its current levels, because contraction in profit margins will impacts valuations.

TripAdvisor’s stock currently trades at $94.75 a share. TripAdvisor’s PE ratio of 64 and Price to Sales ratio of 12.63 imply that huge expectations are factored into these valuations. TripAdvisor valuations are likely to take a beating if profit margin contraction continues to surprise/shock investors. Given that the outlook suggests lower profitability at least in the near term, TripAdvisor’s stock price and its valuations are likely to remain under pressure. Our TripAdvisor stock analysis assigns it a rating of 2.6/5 at its current valuations.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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