- TripAdvisor’s stock has fallen by close to 15% since its Q2 2014 earnings.
- TripAdvisor’s revenue growth, new features and mobile focus are positives.
- However, declining profitability and lofty valuations make it a risky bet.
Following the earnings miss in Q2 2014, the TripAdvisor (NASDAQ:TRIP) stock price has dropped by close to 15% from its peak in 2014. Given its revenue growth and the launch of new features, there are several reasons to be optimistic about the company’s performance over the coming quarters. However, the stock is still expensive at its current valuations. More so, given that profit margins could continue to decline towards the end of FY 2014, the stock’s premium valuations could be at risk.
TripAdvisor Revenue Growth
While the company’s earnings were disappointing in Q2 2014, revenue growth was definitely one of the highlights. TripAdvisor’s revenue grew at its fastest pace in 3 years and returned to levels that were prevalent in 2011.
TripAdvisor’s revenue growth has accelerated due to a combination of factors:
Higher CPC: The company’s meta-search feature collates inventory and availability data from advertisers and allows users to compare options on TripAdvisor’s site. The addition of the feature has reportedly driven the improvement in pricing of clicks in the company’s click based advertising revenue segment. Higher CPC combined with higher shopper growth drove the segmental revenue.
TripAdvisor Acquisitions: Growth in TripAdvisor’s ‘Subscription, Transaction and other’ revenue was driven partly by the acquisitions of ‘Vacation Home Rentals’ and ‘La Fourchette’, the European restaurant reservations site.
While shopper growth points to the popularity and utility of the platform, TripAdvisor’s new features and acquisitions seem to be contributing to its growth.
TripAdvisor Profit Margins
In Q2 2014, the company’s adjusted EPS missed analyst estimates by close to 10% and sent the stock tumbling post the earnings release. TripAdvisor’s profit margins are decent, but they have declined from their earlier levels and could decline further in the coming quarter.
As we had highlighted in our TripAdvisor’s Q2 2014 earnings review, the company is expected to spend an additional $20 million on TV advertising in Q3. Factoring in the expense, TripAdvisor’s operating and net profit margins could come in at about 26% and 19% in Q3. Our estimate is based on the company’s average cost levels over the last twelve months, its projected full year tax rate of 28% and the higher sales and marketing expense due to TV advertising.
TripAdvisor Instant Bookings
While the meta-search feature was aimed at improving the quality of the leads provided to advertisers, TripAdvisor’s instant bookings feature takes one step further in improving conversion rates. The feature which allows users to complete bookings within the TripAdvisor app is currently available to 100% of US mobile traffic and will be rolled out to other geographies in phases.
According to the company, the feature has driven more conversions than meta-search and is expected to be made available to desktop and tablet users in Q3 2014. It’s likely that this will further drive click pricing and boost click based ad-revenue if higher conversion rates are sustained. Further, given that about 50% of the sites total traffic is non mobile traffic, the expansion to non-mobile platforms could serve as a big opportunity.
The feature could also benefit TripAdvisor’s cash flows given that it collects payments from shoppers in advance and pays property owners when the stay happens.
TripAdvisor’s focus on mobile traffic has been evident with the launch of meta-search and instant bookings which were aimed at reducing redirections and friction in the bookings process. The addition of offline functionalities and the integration of platforms like Uber (on-demand taxi/car rental service) will add value to its mobile app. TripAdvisor is one of the first few launch partners for Uber on third party platforms. Interestingly, one of those first few is also OpenTable, which was recently acquired by competitor Priceline.
The feature fits well with TripAdvisor’s other offerings like restaurant reservations while making another service available within the app.
To summarize, TripAdvisor looks great on most counts and provides reasons for optimism about its future outlook. Revenue growth, new features, acquisitions and expansion in its suite of services are the positive take-aways. However, profitability remains a concern.
Though the company’s profit margins are decent at current levels, a consistent decline might be a worry for investors, especially when TripAdvisor’s valuations aren’t cheap. The stock currently trades at a Price to Sales ratio of 13. At its current stock price of $94 a share, TripAdvisor’s PE ratio of 66 is not low either. At its current valuations, any disappointments in terms of revenue growth or profitability in the coming quarters could lead to a correction in the stock price.
Within the same industry, Priceline (NASDAQ:PCLN) is a more attractive investment option with its strong revenue growth (26.4% in Q2 2014), expanding profit margins (27% net margin in Q2) and most importantly, far more attractive valuations. Priceline’s PE ratio of 29 and Price to Sales ratio of 8 make it much cheaper than TripAdvisor. Our Priceline stock analysis highlights why the stock is one of our top stock picks. You can also check our TripAdvisor stock analysis for some more key fundamentals pertaining to TripAdvisor.