TripAdvisor (NASDAQ:TRIP) is set to release its third quarter earnings for fiscal year 2013 on Wednesday, October 23. The company continued its growth momentum in Q2 2013 with a 25% y-o-y increase in revenue, driven primarily by traffic growth. Click-based advertising revenue grew 21% y-o-y on account of robust growth in hotel shoppers in both core and emerging markets. Display-based advertising revenue growth accelerated to 18% owing to a rise in traffic and better sell-through rates. 
Despite the management’s expectation of a temporary slowdown due to the roll out of the new meta-display, we believe TripAdvisor’s user base and revenues will grow. This is achievable through higher sales productivity, expanding mobile and international presence, and the enhanced user experience that the meta feature offers.
Our price estimate of $80 for TripAdvisor marks our valuation at a premium of about 5% to the current market price.
Meta-Display Headwinds To Be More Intense This Quarter
Earlier, TripAdvisor’s partner pages appeared in a pop-up window when a user entered a travel query. The company has now integrated all the search query results on the main page known as meta-search. This enhancement allows users to see travel content, real time hotel pricing and availability from booking partners, all on a single page.
The transition to meta-search negatively impacted revenues by approximately 3%–5% in Q1 2013. The impact was even more magnified in Q2 2013 at 6%–9% as the meta feature roll-out approached completion during the quarter. Management expects continued headwinds on Q3 2013 earnings as it is the first quarter with 100% meta throughout the period. The effects will also trickle down to the bottom-line as hiring and investment plans remained unchanged. On the positive front, the management expects the impact to steadily subside thereafter and the meta-platform to achieve revenue neutrality by year end as it brings more customers on board, conversion rates improve and advertisers become more familiar with the meta-search operating model.
Traffic Growth To Maintain Its Momentum
The number of monthly unique visitors to TripAdvisor’s websites is one of the primary drivers fueling the company’s present 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. The company’s mobile traffic grew over 200% y-o-y and accounted for about 35% of the total traffic. Cumulative downloads for TripAdvisor apps breached the 50 million mark, registering an annual increase of more than 125%.
The meta-display feature has enhanced the overall user experience by addressing queries on a single page. The new transaction-based subscription model has increased the visibility of businesses and helps the company provide the best recommendation to users. Also, the company has a vast international presence with TripAdvisor branded websites in 30 countries and 21 languages. It is presently working on new TripAdvisor domains in localized languages to better serve local travelers and align its offerings with its local OTA partners in the region. We believe TripAdvisor’s user base will continue to grow strongly driven by such factors.
Subscription And Related Revenue To Continue Its Growth Trajectory
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. This also allows TripAdvisor to list those properties at the top which have higher conversion rates, thus providing the best recommendation to the user.
TripAdvisor’s subscription, transaction and other revenue increased by 68% y-o-y in Q2 2013. The company expects to see continued sales productivity in business listings and higher vacation renting due to the introduction of the offering.
Based on the company’s performance in the upcoming Q3 2013 results, we will update our price estimate of $80 for TripAdvisor.Notes:
- Tripadvisor Inc (TRIP) Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 24, 2013 [↩]