Following its spin-off from online travel agency Expedia (NSDQ:EXPE) in December 2011, TripAdvisor (NASDAQ:TRIP), a leading online platform for travel reviews continues to witness rapid top line growth every quarter. Rising traffic and content growth on a global basis has helped the company perform well, despite macro-economic headwinds and high operating costs. TripAdvisor will announce its Q4 2012 earnings on February 13, and we expect the company to post another quarter of solid growth.
With an expanding user base, improving margins and increasing monetization of social and mobile platforms, we believe the company is well positioned to leverage future growth in online travel.
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Rapidly Expanding 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. With an average 54 million unique visitors worldwide, Tripadvisor registered a 31% y-o-y increase in visitors in Q2 2012. 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 of Q3 2012, TripAdvisor had 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.
Social And Mobile Platforms Remain The Key Focus Areas
With the rapid changes in global technology, it is important for online travel companies to stay in line with 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 the exponential growth in mobile devices, an increasing number of people are using mobile and tablets to access the Internet.
With over 32 million logged-in Facebook users using the TripAdvisor application, it is the second most popular application on Facebook, as per AppData. 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).
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 intended to roll out hotel meta display to all of its mobile users in Q4, 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.
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.
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.
We will update our price estimate of $37.89 for TripAdvisor, post the Q4 2012 earnings release.Notes: