According to a recent report, TripAdvisor (NASDAQ:TRIP) has withdrawn its TV ad campaign in the U.S. The advertisement, which was aimed at supporting the company’s new meta-search platform, was tested on American television in June and July only. There has been no ad activity from the company since then, and it is not clear when the advertisements will resume.  The company stated that it’s committed to its advertising budget mentioned it its last earnings call.
A possibility is that TripAdvisor could be waiting for the competitor advertisements in the region to ease. There has been a sudden spike in TV advertising by online travel agencies (OTA) in the U.S. lately. Expedia (NASDAQ:EXPE) has been airing ads for expedia.com, hotwire.com and hotels.com, while Priceline (NASDAQ:PCLN) has been running ads for its express deals business and booking.com.  TripAdvisor’s advertisements would have been less influential in such an environment. Thus, the move to pause advertising activity could be strategic and might resume later.
TripAdvisor initially planned to spend between $40 million and $50 million on offline advertising in the second half of 2013. However, due to the slowdown it now seems that the company may delay this spending.  (Read: TripAdvisor’s Strong Growth Overcomes Meta Display Transition)
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Meta Has Negatively Impacted TripAdvisor In Recent Quarters
Historically, users had to click through individual advertisers from TripAdvisor’s website to check information on hotel pricing and availability. The new meta-display feature allows users to do all the comparison based shopping on TripAdvisor’s website itself by collating and displaying the hotel pricing and availability data from top advertisers. Although this has lowered the number of leads sent to advertisers, the leads are more qualified and have better conversion rates as travelers are more probable to visit advertisers’ websites for booking rather than seeking information.
TripAdvisor charges advertising rates about three times higher than historical rates for the more qualified leads. However, the higher rates have not yet been able to offset revenue headwinds due to fewer leads sent than before. This negatively impacted revenue growth by approximately 3%–5% in Q1 2013. The impact was more magnified in Q2 2013 at 6%–9%, due to the 100% roll-out of the meta feature in the latter part of the quarter.
What Are The Implications Of The Advertisement Withdrawal?
In its Q2 2013 earnings call, TripAdvisor’s management stated that the company could face continued headwinds in Q3 2013 as it would be the first quarter with 100% meta throughout the period, and the effects would also fall to the bottom line as hiring and investment plans remained unchanged. However, it also expected the impact to steadily subside thereafter and meta to see revenue neutrality by the end of the year. 
We believe that pushing more users to try out the meta feature is an important aspect of revenue growth for TripAdvisor. The U.S. is the company’s biggest market. Continuing the TV ad campaign in the country would have helped the company attract more visitors to its website. Although withdrawing the campaign will help TripAdvisor save on advertisement costs in the near term, it could lower the number of unique visitors to its websites. The slower growth in visitors would mean slower growth in leads that are sent to advertisers, making it difficult for the meta feature to achieve revenue neutrality as expected.
Our price estimate of $79 for TripAdvisor marks our valuation at a premium of about 10% to the current market price.Notes: