Following its spin-off from online travel agency Expedia (NSDQ:EXPE) in December 2011, TripAdvisor (NASDAQ:TRIP), a leading online platform for travel reviews, has seen significant upside in its stock price. However, since the company’s Q2 2012 earnings release, the stock has been treading lower. Though TripAdvisor registered a 7% sequential increase in revenues, the marginal decline in Q2 profit did not go down well with the investors.
The company will announce its Q3 2012 earnings on October 30. While we think the macroeconomic headwinds and rising operating costs might slow down TripAdvisor’s growth rate, we maintain a positive outlook for the company’s long-term growth prospects. (Read Our Article: Trends Driving TripAdvisor’s $35 Valuation)
We have a $35.18 price estimate for TripAdvisor which places our valuation at a premium of over 10% to the current market price.
Downward Pressure On Margins
Despite a 16% y-o-y increase in revenues in Q2 2012, TripAdvisor’s net profit fell to $53 million from $54.1 million a year ago. The decrease in profit was on account of TripAdvisor’s traffic quality improvement initiative which led to over 30% increase in total costs. Instead of reinvesting the cost savings in sales marketing, the company reallocated some of it toward traffic diversification efforts, including the marketing campaign on Facebook (NASDAQ:FB). We think that the traffic quality improvement initiative, which aims to increase the conversion rate for TripAdvisor’s clients, is a good long-term business strategy, although it might come at the expense of the near-term growth rate.
TripAdvisor’s general expenses post spin-off have risen considerably. These expenses include costs related to services previously obtained from Expedia, such as accounting, legal, tax, corporate development, real estate, and additional costs associated with being a publicly traded company.
Additionally, TripAdvisor’s profit margins are likely to be under pressure in the near term due to a decline in per-click commission fee paid by Expedia, which is TripAdvisor’s most significant advertising customer in terms of revenue. Expedia plans to reduce the percentage of gross profit (on bookings generated from TripAdvisor-sourced visitors) that it pays to the company in the future, which is likely to reduce Expedia’s marketing spend on TripAdvisor.
However, over time, we expect these expenses to come down and predict a marginal increase in gross margins by the end of our forecast period.
Leveraging Social Media & Mobile Space To Expand User Base
Since TripAdvisor’s business model is primarily driven by the number of unique visitors to its websites, the company has been focusing on expanding its avenues to increase penetration and making its platform more accessible to users. With an average 54 million unique visitors worldwide, it registered a 31% y-o-y increase in visitors last quarter. Also, by the end of Q2, TripAdvisor crossed the 75 million reviews and opinions milestone and continues to witness accelerated growth in contributions per minute.
With a growing focus on social and mobile initiatives, we think the company will be able to further drive up user adoption, registering an increase in unique visitors to its website.
Social Media – Since the inception of its partnership with Facebook in 2010, TripAdvisor has been looking for new ways to leverage the partnership. In April, the company merged its TripAdvisor and “Cities I’ve Visited” applications into one to better integrate Facebook users’ activity within TripAdvisor. With over 32 million logged-in Facebook users using the TripAdvisor application, it is the second most popular application on Facebook, as per AppData. The company further expanded its social portfolio with the acquisition of Wanderfly, a travel inspiration site, this month. (Read: TripAdvisor Adds Wanderfly To Its Social Portfolio)
Mobile – Currently, TripAdvisor has around 27 million unique mobile device visitors and, as of June 30, it reached over 22 million cumulative mobile application downloads for TripAdvisor application. To leverage the rising growth opportunities in the mobile space, TripAdvisor is investing heavily in its mobile platforms such as SeatGuru mobile and tablet applications. Last quarter, the company introduced the Facebook log-in functionality and launched its new iPad application. The launch of 30 new free city guides on iOS and Android platforms takes the total coverage to 50 cities.
We will update our price estimate of $35.18 for TripAdvisor post the Q3 2012 earnings release.