Almost everyone knows TripAdvisor (TRIP), the largest online travel search company. This company’s travelers’ site enables its visitors to plan the perfect trip, featuring reviews and advice on hotels, resorts, flights, vacation packages, travel guides and more. The distinctive thing about TripAdvisor is that it creates a worldwide travel community in which real travelers offer trusted advice and offer a variety of travel choices, allowing every visitor to give its review and opinion and thus creating a vast database. Operating in 39 countries worldwide, including China under daodado.com, the website received 260 million unique monthly visitors in 2013, visitors which generated 150 million reviews and opinions, covering more than 3.7 million accommodations, restaurants and attractions.
This company generates revenue through click-based advertising and display-based ads, as well as from subscriptions and transactions. TripAdvisor also includes TripAdvisor for Business, and manages and operates websites under 20 different travel media brands like bookingbuddy.com, onetime.com, travelpod.com and virtualtourist.com, among others.
During the last quarter 2012, the company decided to change its navigation system, shifting to a meta-travel search model, which displays room rates and availability from top advertisers on TripAdvisor website, without redirecting visitors to other links, which would display pop up ads, as the old model used to do. This model modification generated less click-based advertising revenue throughout 2013, however the last quarter of 2013 the new achieved revenue neutrality and reached the same level of revenue as the old one. With a higher quality virtual platform, bidding is expected to increase during 2014, leading to a higher price per click, more click-based advertising, and a revenue growth projection of 30%.
This industry which is, as we know, highly cyclical, is always subjected to changes and potential fluctuations in the competition. The possibility of other Internet companies such as Google, Yelp, Expedia or Facebook developing travel services is a constant risk TripAdvisor has to face, competing for online visitors. This industry’s principal hazard is represented by a downturn in business and personal travel, which might lead to smaller travel budgets and limitations on consumers’ expenditures. Moreover, hotel companies always try to redirect customer bookings to their own websites, threatening to lower TripAdvisor’s revenue. Nevertheless, analysts grant a narrow economic moat to the company, evidenced by the fact that returns on invested capital have averaged 80% the past three fiscal years.
In this context, it’s important for a company such as TripAdvisor to defend its market leadership through greater visibility and constant innovation. Within this intention, it developed a higher quality model of meta-search, with click-based advertising. The impact this new model has had on the stock price is clear, as it has increased by more than 150% since the start of 2013. Indeed analysts think the stock is overvalued, trading at more than a 25% premium to estimates, with a current P/E ratio of 73.5, meaning more than 30 points above industry the average of 42.7. However, projections for 2014 don’t cease to outline pretty brilliant scenarios in terms of revenue growth.
The metasearch business model allows users to directly book hotels and flights by simply clicking on ad listings that give prices, rates and details, sorted by price, availability and more, depending on users’ choice. Agencies and travel companies bid to get the best placements for their listings, and offer real-time pricing. This model still generates revenue per click from ads for booking hotels and flights. And despite resulting in fewer clicks as it does, the effectiveness of each click is higher, as one click can let a travel product purchaser do what two or more did before. So even though revenue growth per-click ads started to slow at first, with a negative impact of 3% to 5%, the company reached revenue neutrality as of December 2013. "Revenue neutrality means that we have reached a point at which the new (meta-search) product generates revenue at the same level the previous model did," TripAdvisor spokesman Kevin Carter said.
TripAdvisor’s per-click ad rates rose roughly three times higher than the industry average because of its meta-search model, which packs all the pricing options on one page. With more bookings being made by users, as well as intensification in subscriptions, advertisers have increased their will to pay for their listing ads on the site.
A Greener Field
Another innovation was rose by TripAdvsor through the TripAdvisor GreenLeaders program, recently extended into Canada and Europe after its huge success in the U.S. TripAdvisor was able to develop its GreenLeader program in consultation with the U.S. Green Building Council, ENERGY STAR, the United Nations Environment Program, and the International Center for Responsible Tourism Canada, and design a platform to help travelers plan greener trips. TripAdvisor GreenLeaders grants awards — bronze, silver, gold or platinum — to each resort, qualifying them on the subject of their green practices. "With so many travelers placing an importance on the eco-friendly practices of the places they visit, hotel and B&B owners stand to gain a real competitive edge by promoting their environmentally friendly practices," said Jenny Rushmore, director of responsible travel at TripAdvisor.
Despite being over valuated, this company is still delivering high results in terms of revenue, and its constant innovation and lack of immediate competition make its figures more appealing. Yet, this highly fluctuating industry can always pose risks for investors. Most analysts think this stock, despite being highly priced, is worth having in your portfolio. Nevertheless, we are still to see how the new model works once the price of advertisement reaches its peak.
Disclosure: Damian Illia holds no position in any stocks mentioned.