Since its spinoff from online travel agency Expedia (NSDQ:EXPE) in December 2011, TripAdvisor (NASDAQ:TRIP) has registered significant gains in its stock price. However, peaking at $46 in July this year, the stock has been treading lower though it has regained the upward momentum after TripAdvisor’s solid Q3 2012 earnings released last month. While the company has seen revenues grow, its bottom line has been under pressure on account of rising operating expenses. (Read Our Earnings Article: TripAdvisor Results Impress With Global, Mobile Growth)
TripAdvisor is a leading online platform for posting and viewing travel related reviews. With a database of more than 75 million reviews and opinions, it is one of the most popular travel review website. According to comScore, TripAdvisor’s travel community averaged more than 57 million monthly unique visitors in Q3 2o12. 
With a current price estimate of $37.89, we feel that the market has assigned a fair value to TripAdvisor’s stock. While the adverse macro conditions and increasing expense base might restrict short term growth, we believe that certain favorable trends such as the increase in global online penetration, expanding online advertising budget, growth in social media, etc. indicate well for TripAdvisor’s long term growth. Additionally, its focus on innovation and its ability to tap alternate platforms (social and mobile) will help TripAdvisor further expand its user base in the future.
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Focus On Social Media & Mobile Platforms Will Fuel Increase In TripAdvisor’s User Base
We estimate TripAdvisor to derive over 84% of its valuation from click and display advertising on the company’s website. Since its business model is primarily driven by the number of unique visitors to its website, we believe an increase in user base is an important driver for TripAdvisor’s business.
Currently, TripAdvisor has an average of 54 million unique visitors worldwide. As per its recent earnings call transcript, TripAdvisor now has over 36 million members, a 70% y-0-y increase.
Targeting the mobile space and social media, TripAdvisor has been focusing on expanding its avenues to increase penetration and making its platform more accessible to users. We expect both media to contribute significantly toward increasing traffic on TripAdvisor.
Leveraging The Facebook Platform
Facebook (NASDAQ:FB) remains a meaningful channel for TripAdvisor to grow its brand awareness and increase the number of members. Since the inception of its partnership with Facebook in 2010, TripAdvisor has been looking for new ways to leverage the collaboration. Earlier this year, it launched Local Picks, a Facebook application which provides restaurant recommendations from locals and friends. In April 2012, the company merged its TripAdvisor and “Cities I’ve Visited” applications to better integrate Facebook users’ activity within TripAdvisor.
According to PhoCusWright, Facebook users who are referred to travel booking sites are more likely to make bookings 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.
Increasing Mobile Traffic
To leverage growth opportunities in the mobile space, TripAdvisor has been investing heavily in its mobile platforms. 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 has 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.
Apart from social media and the mobile platform, we believe that TripAdvisor’s efforts to prioritize traffic diversification, focus on international expansion, steps taken to achieve higher hotel shopper growth, will contribute to a continuous growth in its user base for years to come.
Page Views Per User To Stabilize With Improvement In Content
Lately, the authenticity of the reviews on TripAdvisor’s website has once again come under scrutiny. Following growing criticism of its apparent failure to monitor fake comments posted on its website, the company was even investigated by the Advertising Standards Agency (ASA) in September 2011. As a result of the investigation, in February 2012, ASA banned the company from claiming or implying that the reviews on its website were from real travelers.
However, TripAdvisor’s founder and CEO, Stephen Kayfer, claims that the company has been dealing with the issue of fake reviews for over 10 years now, and thus has good expertise at identifying people who are trying to spam the system. According to a recent survey conducted by the company last year, around 98% of its audience trust the reviews on its website. 
Additionally, increasing competition from other content and travel review publishers, such as Yelp and HolidayCheck, has led to a decline in the number of page views by a TripAdvisor user every month. TripAdvisor publishes more user generated content than any other travel site. The company 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.
We expect the decline in the page views per user to stabilize going forward as TripAdvisor focuses on further developing the content on its website.
Pressure On Margins Could Limit Future Growth
TripAdvisor’s general expenses post spinoff 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.
However, if TripAdvisor 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.Notes:
- TripAdvisor Reports Third Quarter 2012 Financial Results, TripAdvisor’s Events & Presentations, November 1, 2012 [↩]
- TripAdvisor CEO discusses fake reviews, Google, HotelNewsNow.com, November 17, 2011 [↩]