Here’s What Matters For TripAdvisor’s $38 Valuation

TripAdvisor (NASDAQ:TRIP) is a leading online platform for travel-related reviews. With a database of over 75 million user reviews and opinions, it is one of the most popular travel review websites. TripAdvisor spun off from online travel agency Expedia (NASDAQ:EXPE) in December 2011 and its stock price has increased significantly since then, from $27 in December 2011 to the current level of around $44. We feel the spin-off was a good move as it gave TripAdvisor an opportunity to unlock its value fully, given the different nature of the two businesses.

Here we provide a quick snapshot of how TripAdvisor makes money, the important segments that contribute to its business and the key trends that impact its current valuation.

See our complete analysis for TripAdvisor’s stock

Who are TripAdvisor’s key customers? How does the company make money?

TripAdvisor’s services are used by million of users around the world to make informed travel decisions. As difficult macro conditions impact the travel industry, users are more likely to depend on word-of-mouth and online reviews before making a travel purchase. TripAdvisor plays a key role in simplifying its users’ travel decision by providing them easy access to reviews on various travel products.

TripAdvisor’s services are free for users. It derives a majority of its revenue from advertising, primarily through click-based advertising and to a lesser extent display-based advertising. Hotel owners, airlines and cruise packages are its main advertising customers. Recently it has added destination market services, casinos as well as other non-travel related categories as its potential advertising customers.

The remainder of TripAdvisor’s revenue is generated through a combination of subscription based offerings, content licensing and its recently launched private sale site, SniqueAway.

What are the important segments that contribute to its growth?

Historically, TripAdvisor’s revenue has increased at a rapid pace. The company made close to $640 million in 2011 and earned 52% operating profit on the same, which is constant across its business segments.  More than 90% of TripAdvisor’s revenue comes from display and click-based advertising with the remaining (<10%) derived from subscription fees (advertising via classified listings).

TripAdvisor earned close to $590 million in revenue from display and click-based ads on its website in 2011. While it might derive majority of its revenue from advertisement, its expanding user base is the most important driver for its business, in our view.  TripAdvisor currently has around 65 million unique visitors who visit approx. 17 pages per month. It earns on average $45 per 1,000 page views, which could increase as TripAdvisor expands its global footprint.

Though the subscription revenue for 2011 was only $50 million, we expect it to increase in the future as TripAdvisor leverages its expanding user base and content partnerships.

Historically, TripAdvisor’s EBITDA margins have averaged around 53%. After its spin-off from Expedia, TripAdvisor’s expenses have risen considerable as it has to incur costs for services that it previously obtained from Expedia, such as accounting, legal, tax, corporate development and additional costs associated with being a publicly traded company. However, over time, we expect these expenses to come down and forecast a slight increase in margins.

Current trends that impact TripAdvisor’s valuation

1. Growing concern about the authenticity of reviews – Recently, there have been growing concerns about the authenticity of reviews on TripAdvisor’s websites. TripAdvisor Founder and CEO Stephen Kayfer claims the company has been dealing with the issue of fake reviews for over 10 years now, and thus has good expertise at catching people who are trying to spam the system. Besides, according to a survey conducted by the company last year, around 98% of its audience trust the reviews on its website. ^[1] Thus, we do not expect fake reviews to impact TripAdvisor’s growing user base.

2. Increase in global online penetration – The increase in global online penetration, especially in developing markets, is a favorable trend for TripAdvisor’s business growth. Its growing international reach and expanding user base makes it an attractive option for advertisers. TripAdvisor branded websites include tripadvisor.com in the United States and localized versions of the website in 29 countries including China.

3. Growth in social media & mobile platform – With rapid changes in technology, the growth of social media and expanding mobile user base are important trends that could increase traffic flow on TripAdvisor’s website. Since the inception of its partnership with Facebook in 2010, TripAdvisor has been looking for new ways to leverage the collaboration. With over 32 million logged-in Facebook users using the TripAdvisor application, it is the second most popular application on Facebook, as per AppData.

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 has had over 26 million cumulative mobile application downloads for TripAdvisor application.

4. Increasing competition – In the travel review business, TripAdvisor faces competition from sites such as Yelp and HolidayCheck. In addition, it competes with online travel agencies such as Expedia and Priceline (NASDAQ:PCLN) which also solicit reviews from travelers who book travel on their websites. Moreover, networks with significant user bases such as Google (NASDAQ:GOOG) (via Google Places) are competing more directly with TripAdvisor by attracting and accumulating user-generated travel reviews and opinions, thereby diverting visitors away from TripAdvsior. Thus, we expect the number of page visits per user to slightly decline in the future.

Our price estimate of $37.89 for TripAdvisor is at a slight discount to the current market price. (Read: Why TripAdvisor Is Fairly Valued At $38)

Understand How a Company’s Products Impact its Stock Price at Trefis

1. TripAdvisor CEO discusses fake reviews, Google, HotelNewsNow.com, November 17, 2011 [↩]