A Review on the Review King
TripAdvisor is the world’s largest online travel (and travel research) company. Through its websites, the firm offers not only hotels, flights, rentals and vacation packages, among many other related products and services, but also the most extensive review base on the web. Most of its revenue derives from travel agents like Expedia and Priceline, and other travel vendors, which pay TripAdvisor for deriving traffic. Advertising has become another major source of income, with more than 260 million unique monthly visitors, advertisers are willing to pay big bucks to be on the firm’s websites.
The company has been undergoing a transition process towards a meta-platform (that centralizes all the information, from several booking partners and advertisers in one single page) which seemed quite promising. Although early results were quite discouraging and led to a massive sell-off of its stock, revenue continued to grow, delivering a 25% year-over-year increase last quarter. Click-based advertising revenue, which was the main concern related to the aforementioned transition, grew 21% year-over-year as well.
So, even if the transition towards the meta-display will impact short term growth, it seems bound to drive expansion in the longer term. Several other factors — including the increasing spending on its mobile platform to fully capitalize on the growth of the mobile segment and international expansion — are expected to contribute to TripAdvisor’s user base expansion and, consequently, to its revenue and earnings growth. Actually, analysts (Zacks) expect the firm to deliver average annual EPS growth rates around 20% over the next five years, comfortably outperforming its peers.
Even though several hedge funds had been feeling quite bearish about TripAdvisor and selling out their shares during the first quarter, this tendency seems to be reverting after the announcement of the results for the second quarter. Robbert Karr, founder of Yoho Capital, just recently acquired a part of the company, which represents about 1.7% of his holding portfolio. Following his lead and some other big funds like T. Rowe Price and Fidelity Investments, which have been consistently increasing their shares over the past two years, I would recommend buying and holding on to this stock. Even trading at 46 times its earnings, at a 50% premium to the industry average, TripAdvisor looks like a company you should consider adding to your long-term portfolio.
Opaque Model, Bright Future
Priceline is an online travel company (that also holds a share in other businesses like mortgage services) that has set itself apart from the competition by implementing a “name your own price” marketing strategy, in addition to the regular price-disclosed approach. With this “opaque” model, the firm has successfully attracted value conscious and price-sensitive customers willing to compromise the brand name in sake of a better pricing.
Although last quarter´s results were impressive, mainly thanks to strong hotel and rental-car booking and revenue growth, the current stock valuation at over $930 per share or 30 times its earnings, leads me to recommend holding until a more attractive entry point becomes available. This is not because I don´t believe that Priceline will continue to grow, even outperforming its peers, but because the pricing seems a little high in relation to the uncertainties about the firm´s future.
For starters, the shift towards meta-search remains a strong challenge for Priceline. Even after acquiring Kayak.com, the competition posed by TripAdvisor, Trivago (the European meta-search leader) and Google´s recently launched meta-search service, HotelFinder, continues to create uncertainty. Other focuses of concern revolve around the considerable amount of litigation that the firm currently faces, its continued investments and other currency issues that could affect profitability and stop operating margins from improving.
However, as one of the leading online travel companies in the world, offering some of the best returns and margins in the industry, this is a stock to keep an eye on. Plenty of international expansion opportunities, a great management and marketing strategy (which includes the recent purchase of Booking.com) and a solid financial record bode well for Priceline's future.
This ambivalence has has certainly been reflected on the hedge fund activity. While the T. Rowe Price and Fidelity Investment funds have been selling their shares lately, others like the Vanguard Group and State Street continued to buy Priceline stock. I hate to disagree with Chase Coleman, who recently bought a substantial amount of shares, but this stock seems like a hold for now.
Big Bets, Uncertain Results
Expedia is the other major competitor in the online travel arena. With a market cap of $6.2 billion, it is the smallest among the firms analyzed in this article. However, its growth prospects look appealing, even despite the disappointing performance reported last quarter. Results were considerably affected by the increased spending in marketing (branding at international markets and an offline ad campaign in the U.S.) and the “headwinds created by TripAdvisor's TRIP (a key traffic contributor historically) shift to meta-search display in the past quarter” (Morningstar). Both of these factors should drive growth in the longer term, even though results are taking a hit at the moment.
So, the question here is: Is Expedia a buy, trading at 45 times its earnings, a substantial premium to the 27x industry average? I’d say it is not, and several big institutional holders like JPMorgan and State Street seem to agree. Each of them sold over half a million Expedia shares over the past two years. Buy why?
Similar to Priceline’s case, the significant amount of litigation that the firm faces and the competition posed by Priceline and Google are big sources for concern. Moreover, Expedia’s Hotwire (opaque-model) business also confronts serious challenges. An ameliorating travel market is leading to higher occupancy, thus limiting Hotwire’s inventory. In addition, the rising promotion of Priceline’s competing “Express Deals” is also expected to impact the webpage’s profitability.
Although considerable growth is projected for the online travel industry, fierce competition and the rise of mobile technology will certainly pose a challenge for those seeking to get a hold of the increasing demand. In this scenario, Expedia´s and Priceline´s future looks somewhat uncertain. However, TripAdvisor seems safer. Having dug a considerable moat around its business on the back of its wide review base, TripAdvisor looks like a stable company with plenty of upside potential. In other words: a stock to buy and hold.