Background and history
TripAdvisor owns the popular travel site TripAdvisors.com and a few other smaller brands, allowing travelers to plan and book trips. Its most significant asset is more than five hundred millions of travelers’ reviews and opinions about travel destinations, accommodations, activities and attractions, and restaurants. TripAdvisor-branded websites are in 48 markets and 28 languages worldwide.
Tripadvisor was co-founded by Stephen Kaufer, the current CEO, in year 2000. Mr. Kaufer holds an A.B. in computer science from Harvard University. Liberty TripAdvisor Holdings, a company controlled by Liberty Global, owns 21.9% but has 57% voting power as a result of 12.8 million class B shares. Big shareholders include Baillie Gifford, Vangard, Jackson Square Partners, Blackrock and Brown Advisory, each of whom holds 5% to 9% of the stock. The CEO and other executives do not hold much stock in aggregate, with the CEO holding a mere 1 million shares.
TripAdvisor has two segments, hotel and non-hotel. The hotel segment accounts for 80% of the revenue and non-hotel 20%.
In the hotel segment, the company is mainly what is called “megasearch,” which sorts hotel listings for travelers to find the best and cheapest. It charges its customers such as online travel agencies (OTAs) and hotels on a per-click basis as travelers click on the listing and then leave TripAdvisor's website to book their hotels. Starting from 2015, the company also tried to become a booking agent in an experiment called “instant booking,” which allows travelers to book hotels with TripAdvisor instead. TripAdvisor then books its revenue on a per-transaction basis. The experiment was largely unsuccessfully as witnessed by a significant decline in revenue per hotel shopper. The company de-emphasized the efforts this year.
TripAdvisor uses revenue per hotel shopper and number of unique hotel shoppers to measure its economics. The growth in number of hotel shoppers has not been a problem. But the indicator lagged the 20% growth in room nights booked by Priceline and Expedia.
TripAdvisor’s non-hotel segment, where the company helps the travelers to book restaurants and attractions, has been growing rapidly. It had been loss making until the third quarter but holds great potential as advertisers are very segmented. Long term the margin should be the same as hotels or even higher.
Growth
According to TripAdvisor, who quoted Phocuswright Global Online Travel overview, Global travel market is a $1.3 trillion industry growing at 5-6%. Online penetration is 43%. Online bookings have grown at low double digits. But TripAdvisor has not been able to capture the same growth rate as its biggest customers, OTAs, as the growth in volume is offset by the decline in unit price.
Moat
TripAdvisor’s major assets are its industry leading review website that boasts 455 million average monthly unique visitors, 570 million reviews and 270 new content contributions per minute. Nobody else has this vast data set in the travel industry yet. Although the entry barrier is low to create this kind of content, TripAdvisor does have a significant first mover advantage in this regard.
Unfortunately, TripAdvisor does not appear to be able to translate its popular website into higher revenue. Margins have also declined since the spinoff, from 45% to 8% in the last 12 months.
Before the third quarter, the company’s explanation was that 2016 was the low point for two reasons. First, the rollout of its “instant booking” experiment flopped and didn’t bring enough revenue per shopper. Second, more and more travelers moved to mobile to book their travels. Mobile phones have limited screen size and resulted in much lower revenue per shopper. But in its second quarter conference call, the management mentioned weakness in “cost per click” auction by advertisers. In the third quarter, management said that as the partners “improve marketing efficiencies" in its channel, the revenue per shopper dropped 11%.
I think the biggest problem with TripAdvisor is that the two giant customers, Priceline and Expedia, account for almost 50% of TripAdvisor’s revenue. To make things worse, Priceline owns Kayak and Expedia owns the majority of Trivago. Kayak and Trivago are direct competitors of TripAdvisor in hotels megasearch. Trivago guided for revenue growth at 50% with EBITDA margin at 3% for 2017. It appears that the company is determined to grab market share at the expense of profitability.
Priceline apparently was not happy with TripAdvisor getting into the OTAs turf. In the third quarter conference call, Priceline's CEO commented, “In performance-based channels, competition for top placement has reduced ROIs over the years and been a source of margin pressure, with an increasing share of the unit economics accruing to the benefit of our advertising partners. This has been a concern to us since some of these partners use our advertising dollars to compete with us in the advertising funnel and represent themselves as places to not only research travel, but also book it.”
Separately, Trivago, with parent Expedia's contribution close to 40% of revenue, said, “We believe our financial performance in Q3 2017 was negatively impacted by our largest advertisers having changed their profitability targets on our marketplace.” Therefore, TripAdvisor is facing the problems of big clients accounting for 50% of revenue pressing on pricing, and strong competitors who are owned by its two biggest clients bidding aggressively to take market share. It is not a good combination.
Therefore, although TripAdvisor is a great research site for travel, it is doubtful its hotel segment would get exciting, at least not as exciting as its much bigger rivals, Priceline and Expedia. In addition, Google is an emerging deep-pocketed competitor with advantages of labeling the hotels on Google Map.
Management
For investors, it is hard not to get disappointed for the very significant straight line margin decline from 45% to 8% since the spinoff. ROIC also decreased from 35% to 8%. Management owns a puny amount of stocks and for the most part have been selling.
The executive pay does not appear to be outrageous. The CEO was paid a little over $1 million for the last three years and compensation dropped in 2016, although not by much. But the real problem seems to be the performance matrix shown below, which is based primarily on revenue growth and stock price increase.
- The revenues of TripAdvisor in any of the three consecutive calendar quarters beginning with the second quarter of 2015 must be at least 10% higher than the revenues in the corresponding calendar quarter 12 months before, excluding the benefit of any acquisitions by TripAdvisor during this period.
- The closing price per share of TripAdvisor common stock must be at least 5% higher than the closing price of TripAdvisor’s common stock on Feb. 5, 2015, which was $70.58 per share, on any 30 trading days during the period beginning Feb. 6, 2015, and ending Dec. 31, 2015 (such days not necessarily consecutive), taking into account any Share Change or Corporate Transaction (each as defined in the 2011 Plan).
This explains in part why the revenue increased at lower margin and lower ROIC each year for six years in a row.
Financials
Financial modeling at this point of time does not make sense, as the topline growth has not been catching up with industry growth due to pricing pressure in the hotel segment, which won't likely abate for at least a few quarters. The expenses have been more or less out of control in the last several years. And competitor Trivago is getting significantly larger yet is just as aggressive as before. Therefore, the bottom line is hard to predict. The non-hotel segment is still only 20% of revenue; it does not look like it has a chance to reverse margin trends for the short term.
Valuation
TripAdvisor should be valued using a sum-of-the-parts model, as the hotel segment, which has two customers accounting for 46% of the revenue, has completely different dynamics from the non-hotel segment. Using comps of Yelp for the non-hotel segment, and Trivago for the hotel segment, the current stock price appears fair. The assets have potential, but as the fundamentals are still going through deterioration, it is hard to see the way out for now.
Catalysts
For the stocks to work, investors need to see two things: revenue per hotel shoppers to stabilizing and management changing or developing a strategy for change.
No. 1 is a lot of hard work. No. 2 could happen as Liberty Global is the major shareholder of TripAdvisor. But meanwhile, it is surprising to see the executive compensation structure at TripAdvisor, with Liberty Global owning almost 60% voting share, is as vague and inappropriate as it is right now.
Disclosure: no position in any of the stocks mentioned.
