TripAdvisor (TRIP) is a leading travel platform. The company’s mission is to help travelers reach the full potential of every trip. Their websites and apps have accumulated more than 830 million reviews and opinions across millions of accommodations (hotels), restaurants and travel experiences (like tours and local activities). As shown below, their user base has continued to grow over the years, with hundreds of millions of unique visitors coming to their properties each month (roughly two-thirds of users accessing TripAdvisor’s properties are doing so from a mobile device).
Five years ago, TripAdvisor was firing on all cylinders. Revenues had roughly tripled over the previous five years, from $500 million in 2010 to $1.5 billion in 2015. The stock, at ~$85 per share at the end of 2015, had roughly tripled as well (TripAdvisor was spun off from Expedia (EXPE) in December 2011 at a price of ~$28 per share). But then growth came to a halt. Revenues in 2019 will be around $1.6 billion, only slightly higher than in 2015 and down by low-single digits from 2018. Earnings growth has been lackluster as well, with TRIP expected to earn ~$1.7 per share in 2019 compared to ~$1.6 per share in 2015. When combined with a significant contraction in the price-to-earnings (P/E) ratio, shown below, the stock has fallen more than 60% since year end 2015.
It’s important to understand what has happened over the past few years. We can get a better idea of where the issues have been concentrated by looking at a breakdown of the segment results.
As you can see, the Non-Hotel business has continued to move forward, with revenues doubling from 2015 – 2018 (now accounting for nearly one-third of TripAdvisor’s revenues). In addition, the segment has shown an improvement in profitability, with mid-teens EBITDA margins in 2018. The Hotel segment, on the other hand, has struggled. Revenues in 2018 were $100 million lower than they were in 2015. In addition, segment EBITDA margins have contracted by a few hundred basis points, resulting in a cumulative decline in segment profitability of roughly 25%.
TripAdvisor has faced two major issues in its Hotel business in the past couple of years. The first was pressure on their auction / click-based advertising revenues in 2017 following a pullback from online travel agencies (OTA’s) like Expedia and Booking Holdings (BKNG), partly attributable to the fact that TripAdvisor started competing with them more directly.
As Chief Financial Officer Ernst Teunissen noted at an investor conference in late 2018:
“What we saw a year ago is that some of our partners - one of our partners in particular – were looking for a higher efficiency from their marketing spend; bids came down in the third quarter last year, and that has stabilized since. We have not seen any further changes in our auction, that seems to have stabilized. That's part of the equation that we control less of and fortunately that has been stable.”
That’s still the case today. As CEO Stephen Kaufer noted a few months ago, “we’ve seen a pretty stable environment from our key partners in the hotel auction over this year.”
More recently, TripAdvisor has faced additional pressure as Alphabet (GOOG, GOOGL) continues to use their dominant search engine to move further onto TripAdvisor’s turf. Here’s what Mr. Kaufer said about the situation on the company’s most recent conference call:
“We did see some incremental SEO (search engine optimization) headwinds over the course of the quarter. It's always hard to know exactly what Google is doing. We think of it as how far down the page is our organic result. And I think you're seeing this across the industry as Google has gotten more aggressive. We've been predicting this of course for the past many years. We know that this SEO piece is an ongoing trend and we're not predicting that it's going to turn around.”
As Ben Thompson outlined in a recent Stratechery article (“The Google Squeeze”), TripAdvisor has leveraged its hundreds of millions of relevant reviews to rank highly on a plethora of search terms related to travel. However, as Google has begun including its own travel products at the top of search results (for hotels, it’s a map with various options for the city and dates you’re searching for), TripAdvisor has been pushed further down the page – and the link is less compelling than Google’s offering. A drop-off in the highly valuable, high margin traffic that they used to generate from Google searches is material, and it doesn’t seem like investors should expect this to improve anytime soon.
When he was recently asked how TripAdvisor differentiates itself from its competitors, particularly Google, Mr. Kaufer said the following:
“We are blessed by having such an incredible footprint of traffic, a global brand and a trusted brand. When folks all over the world are looking for that considered trip, for that special vacation, they're turning to TripAdvisor. They may find us through a variety of different channels, but it really is TripAdvisor that they're looking for. How do we compete with all of the competitors, including Google? That's a challenge. Google is up-funnel from us. The OTA’s are some of our biggest clients and also have metasearch engines of their own. Our answer is not for people to think of us as a metasearch engine for hotels but to think of us as a site to plan an amazing vacation. And that's not the space that others occupy. You can't go to a Google or an OTA or any of our competitors and look for recommendations from people about where to go and how to maximize your precious vacation time. TripAdvisor, with the size of our footprint, with the content that we have… remains a category of one in the ecosystem… As a considered trip, as planning the whole vacation, we believe we are the ones best suited to address that need.
When it comes to how we do that, we've done a number of things. Our review count continues to grow. We have a number of social features on the site for the folks that are looking for that type of inspiration. And then I pull us back to our growth in membership, because when we query our audience, when we do our user feedback survey, everyone continues to tell us, we love the recommendations, especially when they are people like me helping take me where I want to go. And that combines nicely with the trust that people already have in the TripAdvisor brand and the fact that it's not just a magic algorithm, it's real people behind the content helping you. That's where you'll see us continue to focus in the coming years, because we believe it is truly a differentiator between TripAdvisor and the set of competitors that you named and whatever new competitors arise over the next decade.”
I think there’s a lot of truth in those comments. I believe TripAdvisor is a best in class brand with the most complete offering when it comes to researching a trip - but that has been true for years. The question, in my mind, is what that means in terms of the long-term economics of the business. Can they effectively monetize the traffic that comes to their properties? I’d note that as they attempt to grow non-auction revenues, the company will need to build new muscles (for what it’s worth, this category accounted for roughly half of TripAdvisor's year to date revenues through Q3 FY19).
In terms of their ability to do this, I think a fair amount of uncertainty remains. Of course, that’s why you can buy the stock at a valuation that looks quite cheap relative to where the business has traded over the past 5-10 years. I’m not currently an investor in TripAdvisor, but that could change if I became more certain about their long-term ability to more effectively monetize their user base.
Disclosure: Long BKNG
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