- TripAdvisor is poised for a solid Q2 2014.
- Acquisitions and new features will drive growth.
- TripAdvisor is a risky bet at its current valuations.
TripAdvisor’s (NASDAQ:TRIP) stock price is up 22.5% since our last coverage of the stock. We thought it was expensive at $85 a share and we still think it’s a risky bet at $103. We think TripAdvisor will benefit from its recent acquisitions, and the launch of new features like bookings and offline accessibility. Approaching the company’s Q2 2014 earnings release we are optimistic about the company’s financial performance. That said, the stock may have already factored in all the positives, making it a risky bet at its current valuations.
TripAdvisor Revenue Growth & Profitability
Looking back at TripAdvisor’s last earnings release, the company missed revenue and EPS estimates by a small margin. However, both growth and profitability remained healthy. TripAdvisor registered a Y/Y growth of 22% for Q1 2014, growing slightly faster than its average growth over the last 2 years.
Over the last 3 years, the company has averaged net profit margins of 24.7%. Relieved of the pressures from spends on the meta search platform and TV advertising, TripAdvisor’s profit margins recovered to more familiar levels. The company clocked operating and net profit margins of 34% and 24% respectively in Q1 2014.
TripAdvisor’s cash flows were strong with operating cash flows at 1.6 times its net income and a free cash flow margin of 31%. At last count, the company had cash and cash equivalents of $745 million.
TripAdvisor Revenue Guidance & Acquisitions
TripAdvisor hiked its revenue guidance from a ‘mid 20s’ growth to a ‘high 20s to low 30s’. Given what the company has been up to of late, that doesn’t seem outlandish either. That said, it’s likely that some part of the revision is on account of its recent acquisitions.
In its previous earnings release, TripAdvisor also announced the acquisition of a profitable European restaurant reservations platform ‘The Fork’ or ‘La Fourchette’, which operates in France and Spain. Priceline (NASDAQ:PCLN) recently followed suite with the acquisition of a similar US listed portal, OpenTable (NASDAQ:OPEN).
TripAdvisor also acquired two other platforms, ‘Vacation Home Rentals’ and ‘Tripbod’, an interface between travellers and local experts. With these acquisitions, the company has widened its suite of offerings to become a more comprehensive service.
Potential Drivers of Growth
TripAdvisor’s new meta search feature helps TripAdvisor pass on better quality leads to advertisers, leading to higher conversion rates. It’s very likely that this development with help the company command a higher Cost Per Click (CPC) for ads served in Q2 2014.
Mobile Focus - Mobile Bookings and Offline Features
The mobile user has become the most valued commodity in the internet economy today. In Q1 2014, TripAdvisor reported that mobile traffic accounted for 44% of its total traffic. The rollout of TripAdvisor’s latest features is very likely to bump up that number.
The portal has rolled out its ‘Instant Bookings’ feature which allows users to complete their bookings on the TripAdvisor mobile app and mobile website. This means higher conversion rates, a good thing for advertisers and TripAdvisor, and less hassles for the user, making it a win-win situation for all involved. Higher conversion rates typically also mean higher revenue for TripAdvisor.
More importantly, TripAdvisor gets to retain users on its properties for longer, increasing its user monetization potential. According to a study quoted by TripAdvisor in its press release, 90% of travelers use their mobile phones on vacation, with 27% using their phones to look for hotels. To further leverage this, a new offline feature on the smartphone app will allow travelers to access reviews, photos and city maps without connectivity.
One must note that none of the factors mentioned in this section have been factored into the company’s revised guidance, implying that there’s more room for a surprise in its Q2 numbers.
TripAdvisor Stock Valuation
So, TripAdvisor is becoming a more comprehensive travel portal with deeper capabilities including meta search and bookings. Given all the factors we’ve discussed, TripAdvisor is poised for a good Q2 2014. That said, its current stock price seems to have factored in all of that potential upside.
At a stock price of $103 a share, TripAdvisor currently trades at a Price/Earnings multiple of 74 and a Price/Sales multiple of 16. The stock is expensive on both parameters and there’s no two ways about that. The stock ran up after the Q1 2014 earnings release, reacting to the upward revision of its FY 2014 revenue guidance.
TripAdvisor is a great company with solid revenue growth and profitability and it looks poised for exciting times. However, clearly, a lot is riding on the positive outlook for TripAdvisor, and any slip up could mean a correction, especially at these valuations. We think TripAdvisor is a risky bet at its current stock price. Our analysis of the TripAdvisor's stock assigns it a rating of 2.7/5.