We have updated our price estimate for TripAdvisor to $79 from $60 based on the Q2 2013 results, and the growth momentum which we now expect to strongly pick up in 2014. We have increased our forecast for the number of monthly unique visitors to TripAdvisor’s websites. The completely rolled out meta-search feature and efforts to enhance content, visibility and user experience are the primary factors driving our estimates.
TripAdvisor (NASDAQ:TRIP) experienced low ad bidding activity in Q2 2013 as advertisers were wary of the meta-display transition. However, one of its biggest advertising partners, Expedia (NASDAQ:EXPE), is now ramping up bidding activity on the website. Participation from other advertisers is also growing, lifting the level of competition. We forecast ad revenue earned by TripAdvisor per page viewed to get a boost from the rise in bidding activity.
The Number of Monthly Unique Visitors Will Experience Steeper Growth
TripAdvisor’s user base has nearly tripled compared to last year due to its dominating presence in the global travel review industry. TripAdvisor websites averaged over 220 million monthly unique visitors in Q2 2013, representing 10% sequential growth.
We believe the meta-display roll out, which approached 100% completion in Q2 2013, will help TripAdvisor expand its user base in the long run as it enhances the overall user experience by addressing queries on a single page. Moreover, the feature will also help the company compete against Priceline’s Kayak and Expedia’s Trivago, the meta-search market leaders in the U.S. and Europe respectively. (Read: TripAdvisor’s Strong Growth Overcomes Meta Display Transition)
In our view, other factors such as enhanced content, greater visibility of businesses, and real-time pricing and availability, will also play an important role in attracting more users.
1) TripAdvisor Connect Will Offer Real-Time Availability And Enhanced Content: TripAdvisor will be launching TripAdvisor Connect, a platform that will enable business listings subscribers to provide real-time availability and online booking to travelers via their Internet booking engines, towards the end of the year. Additionally, TripAdvisor Connect also includes Review Express, an offering that automatically generates emails to be sent to guests for post-stay review solicitation. This will help TripAdvisor add fresher, more valuable and verified content about properties on its website. 
In August, TripAdvisor stated that a total of 210 Internet booking engines covering 135,000 hotels and B&Bs worldwide signed up for TripAdvisor Connect before the launch, ahead of the company’s expectations. Moreover, close to 90% of these committed 210 Internet booking engines have opted for the premium offering. TripAdvisor estimates a greater number of booking engines to sign up in the next few weeks. 
2) The New Free-To-List Transaction Model Is Increasing Visibility of Businesses: The new transaction based-model introduced in Q1 2013 is different from the old subscription model under which properties paid a subscription fee to TripAdvisor for business listing. Now, properties are free to list but they pay on a per transaction basis, which has resulted in a greater number of businesses listing themselves. TripAdvisor’s subscription related revenue growth, which stood at 68% y-o-y in Q2 2013, is testimony to the increase in business listings.  The new model also allows TripAdvisor to list those properties at the top which have better conversion rates, thus providing the best recommendation to the user. The company expects to see higher vacation renting due to the introduction of the offering.
The number of monthly unique visitors to TripAdvisor’s websites is one of the primary drivers fueling the company’s present growth. We estimate the metric to increase two-fold, crossing 460 million by the end of our review period compared to our earlier forecast of 360 million.
If the number of unique visitors rises to 500 million instead, there could be almost 10% upside to our price estimate. However, if competition weighs on TripAdvisor’s traffic and the meta feature fails to please users, the growth in unique visitors could moderate. A scenario where the number of unique visitors approaches only 350 million by the end of the forecast period, translates into 20% downside to our price estimate for the company.
Enhanced Revenue Per Page View With Increased Bidding Activity From Expedia
Ad bidding activity from TripAdvisor’s bigger partners was low in Q2 2013 as these advertisers were evaluating the performance of the meta-display at their end and held back advertising spend. The contribution of advertising revenue from Expedia to TripAdvisor’s total revenue declined from a substantial 28% in Q2 2012 to 22% in Q2 2013.  Expedia’s Q2 sales were also affected as it appeared in fewer searches on TripAdvisor sites. However, TripAdvisor recently revealed that Expedia is ramping up ad bidding activity on its websites following the Q2 slowdown. 
TripAdvisor’s global reach is highly attractive to advertisers. This allowed it to double the revenue earned per page viewed from $33 in 2010 to $66 in 2012. With rising competition in the travel industry, we believe more advertisers will come on board and bidding activity will heat up allowing the company to further increase advertising rates.
Based on this, we have increased our forecast for ad revenue per thousand pages from $90 to $120 by the end of the forecast period. If ad revenue per thousand pages rises beyond $140, there could be an upside over 10% to our price estimate. On the contrary, if competition puts pressure on the advertising rates charged by TripAdvisor, ad revenue per thousand pages could decline to $100, leading to 15% downside to our stock estimate.Notes:
- TripAdvisor Connect: Known Knowns, Known Unknown and Unknown Unknowns, Tnooz, July 12, 2013 [↩]
- TripAdvisor Connect: 210 Internet Booking Engines Now On Board, August, 2013 [↩]
- TripAdvisor Q2 2013 Earnings Call, Seeking Alpha, July 24, 2013 [↩]
- Form 10-Q, www.sec.gov, July 2013 [↩]
- Expedia CEO: Expedia Once More Bidding Strongly, Seeking Alpha, August 14, 2013 [↩]