Saturday, November 11, 2017 14 comments ++[ CLICK TO COMMENT ]++

A Look at Tripadvisor (TRIP) and its Two Problems

It's hard to find anything that seems cheap in the current bull market but as in any market, some stocks do sell off for various reasons. One of the ones that attracts me is Tripadvisor (TRIP*). As the chart below illustrates, the stock is trading near a 5-year low and is down about 70% from its 2014 peak (share count hasn't changed much and no major return of capital to shareholders).

(* You can also own TripAdvisor indirectly through John Malone's holding company, Liberty TripAdvisor, with ticker symbols LTRPA/LTRPB. You should evaluate this option as well. Sometimes holding companies, especially if it is well run like most Malone companies have historically been, are better; sometimes they are not (there may be additional overhead/fees for the holding company, may have worse shareholder rights (doesn't favour minority shareholders) and market generally places a holding company discount on such shares and they may be illiquid))

I remember looking briefly at TripAdvisor several years ago when it was spun out of Expedia (I was evaluating Expedia at that time--too bad I didn't buy that) and it seemed very expensive at its IPO. I think its P/E at IPO was 50+ and Price/Revenue was 10+. The market was definitely pricing TripAdvisor with expectation of very high growth rates.

Now that the stock has sold off quite a bit, is it cheap?

Well, the revenue has doubled since 2012 from $700M (roughly) to $1.5B now. But its profit has fallen from a peak $226M in 2014 to $120M last year and about $96M TTM. Profit may be temporarily depressed (depends on how you view their current problems).

TripAdvisor is attractive for a few reasons:
  • Massive moat: TripAdvisor has 390+ million unique monthly visitors. This is a massive number and very few internet companies in any industry can reach such numbers. As a customer of TripAdvisor and someone who uses the site quite often for travel, I think the switching costs are very high and I doubt too many other companies can replicate its content for travel planning.
  • Low capex, high ROE: When the company was doing well a few years ago, it had 20%+ ROE. Now it has dropped below 10% but it depends on if you think current profitability is temporary or not. The company has low capex requirement and product/service doesn't become obsolete easily.
  • Good (low to moderate) growth potential: The online travel industry is likely to become more popular over time. Although TripAdvisor may have captured most of the obvious customers, it will still grow, at a minimum I think it will grow at inflation + population growth.

Having said all that, there are two big problems with TripAdvisor...

Strong Moat, Low Profits?

First of all, I have been thinking hard about this company and researching it quite a bit and... is this one of those companies that has a strong moat but low ability to profit from it? Is it another Yelp (YELP)--a dominant restaurant/event/shop review site that has been unable to make much money. TripAdvisor has a lot of online visitors and has tried all sorts of things over the years but hasn't really made much money. As a user of TripAdvisor, I don't think they can easily increase profitability (other than go into adjacent verticals or something).

TripAdvisor vs Priceline/Expedia

Secondly, TripAdvisor appears to have little bargaining power and seems to depend heavily on two companies for almost half of its revenue. From the 2016 10K,
"We derive a substantial portion of our revenue from a relatively small number of advertising partners and rely significantly on our relationships. For example, for the year ended December 31, 2016, our two most significant advertising partners, Expedia and Priceline (and their subsidiaries), accounted for a combined 46% of total revenue."
This is actually listed under the risk factors at the front so it shouldn't be a surprise to most but it still makes me nervous. Basically, online travel agents, Expedia and Priceline, contribute almost half (46%) of their revenue.

To make matters worse, those two are sometimes direct competitors, especially in some recent direct booking services being pursued by TripAdvisor. They are probably best considered frenemies. Apparently TripAdvisor is rolling back those services (probably after Priceline and Expedia started a battle and decimated TripAdvisor).

Furthermore, if I'm not mistaken, TripAdvisor generates less than 5% of Priceline's revenue (probably the same for Expedia). This basically means that Priceline doesn't care if it loses the TripAdvisor revenue; in contrast, TripAdvisor cares very much about Priceline's payments to TripAdvisor.

If you ever studied corporate strategy or Porter's Five Forces or anything like that, you will see that TripAdvisor is in a bad competitive situation here. You just don't want to be in a situation where two entities, who are sometimes your competitors, are responsible for 46% of revenue, while they get less than 5% of their total revenue from you!

Worth Waiting and Seeing

Although the competitive/supplier/customer industry dynamic looks bad for TripAdvisor, it is still worth investigating because some of its advantages are pretty big. I really can't see too many companies (except possibly something like Facebook) being able to capture almost 400 million global travelers who use the site on a regular basis. Even companies like Amazon likely can't (Amazon doesn't have strong brand outside a few regions like North America/India/etc, or outside tech circles). I'm just not sure how well TripAdvisor can monetize its users.

TripAdvisor's heavy reliance on Expedia and Priceline is also largely due to the hotel segment. If TripAdvisor can generate revenue from other travel-related segments (attractions, airlines, train bookings, global/foreign events, etc), it can lessen its dependence. Remains to be seen what the company does.

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