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 it has gained momentum post the strong Q3 2012 earnings. TripAdvisor posted record revenues of $213 million, marking an 18% y-o-y increase, and registered a robust 9% annual growth in net income in the third quarter.
Despite macro headwinds, TripAdvisor expects the growth momentum to continue this quarter as well. Deriving close to 84% of its valuation from click and display advertisement, as per our estimate, we believe an increase in user base is the most important driver for TripAdvisor’s business. While tapping alternate platforms to expand its user base could lift TripAdvisor’s stock price in the future, a failure to clamp down expenses would put a downward pressure on the stock.
Increase In TripAdvisor’s User Base
TripAdvisor’s business model is primarily driven by the number of unique visitors to its website, and thus an increase in the number of visitors in an important indicator of its future growth. Currently, the company has an average of 54 million unique visitors worldwide. According to comScore, TripAdvisor’s travel community averaged more than 57 million monthly unique visitors in Q3 2o12, a 6% sequential increase. 
TripAdvisor offers its content in 21 different languages with more than 60 contributions per minute, which equates to over 30 million contributions in a single year. As per its recent earnings call transcript, TripAdvisor now has over 36 million members, a 70% y-0-y increase. As the company continues to prioritize traffic diversification, focuses on international expansion, and targets higher hotel shopper growth, we believe it will continue to register growth in its user base for years to come.
If the user base increases to 150 million, instead of 124 million we currently forecast, there would be 10% upside in our price estimate for TripAdvisor.
Social & Mobile Platform Remain Key Areas Of Focus To Expand User Base
With the rapid changes in global technology, it is important for online travel companies to stay abreast of changing consumer preferences. With an increase in online penetration globally, consumers are increasingly using online social media such as Facebook (NASDAQ:FB) as a means to communicate and exchange information, including travel information and opinions. On the other hand, with exponential growth in mobile devices, an increasing number of people are using mobile and tablets to access the Internet.
Thus, we feel that to further drive up its user adoption, it is imperative for TripAdvisor to focus on developing its social and mobile platforms.
Social Media – TripAdvisor entered into a partnership with Facebook in December 2010, and launched a setup that allowed users to receive “Instant Personalization” when visiting the site with an active Facebook account. TripAdvisor took the partnership a step further with the subsequent launch of Local Picks, a Facebook application which provides restaurant recommendations from locals and friends. TripAdvisor recently launched a new application for business owners which helps create a TripAdvisor tab for their business’s Facebook Page, helping them showcase their reviews and accolades on the Facebook community.
According to PhoCusWright, Facebook users who are referred to travel booking sites are more likely to book travel than those referred via search engines such as Google (NASDAQ:GOOG). With over 32 million logged-in Facebook users using the TripAdvisor application, it is the second most popular application on Facebook, as per AppData.
As TripAdvisor continues to spend on this medium and intends to further leverage Facebook’s social content, we feel the same can be an important driver to expand the company’s travelers database.
Mobile Applications – Smartphone adoption around the world is skyrocketing and is fundamentally changing the way people get travel advice. According to IDC, mobile travel spend is expected to cross the $2 billion mark by 2014, registering y-o-y growth of above 40%. Additionally, mobile ad spending in the U.S. is expected to grow from $1.5 billion in 2011 to close to $10.8 billion by 2016.
To leverage growth opportunities in the mobile space, TripAdvisor has been investing heavily in its mobile platform. It announced the launch of its mobile website in March 2010 and has since added apps for the iPhone, Android, Nokia, Palm smartphones, as well as the iPad. Currently, TripAdvisor has around 35 million unique mobile device visitors and, as of September 2012, it reached over 26 million cumulative mobile application downloads for TripAdvisor application.
TripAdvisor intends to roll out hotel meta display to all of its mobile users this quarter to further fuel growth in mobile traffic. Similar to the flight product, hotel meta display shows partner prices and availability in line, allowing an easy comparison of booking options.
Pressure On Margins Could Limit Future Growth
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. While in Q2 2012 TripAdvisor registered a marginal decline in profits, net income in Q3 2012 registered a robust 9% annual growth.
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However, if the company fails to clamp down its expenses and margins drop down to 46% by the end of our forecast period, it would lead to a 12% decline in our price estimate.
Our price estimate of $37.89 for TripAdvisor is almost in line with the current market price.Notes: