Apart from paid search advertising, TripAdvisor (NASDAQ:TRIP) also relies natural search traffic to attract users. A recent study conducted by an independent search and social media marketing agency, Greenlight, revealed that TripAdvisor’s share of natural search visibility increased by 12% in November since the previous Greenlight hotel report in August. In addition, TripAdvisor turned out to be the most visible of the brands looked at in the social media analysis by Greenlight. (See Study reveals November hotel search results, Travolution, Jan 13)
Natural search traffic results correlate to how TripAdvisor’s pages are indexed in search engines and how prominently those pages are displayed in search results. With increased natural search visibility, TripAdvisor websites are likely to receive higher traffic and page views. Besides aiding the generation of new content, this makes TripAdvisor platforms more attractive to advertisers. This also augurs well for the advertising placement rates charged by the company resulting in a higher Ad Revenue per Page View (RPM).
We estimate that TripAdvisor’s RPM increased from ~$25 in 2008 to ~$33 in 2010. Riding on the healthy online advertising growth, we expect this to rise steadily reaching $54 by the end of our forecast period. However, increasing RPM on a base of relatively small number of significant advertisers including Expedia (NASDAQ:EXPE) could be challenging for TripAdvisor. Below, we discuss these factors in more detail.
We have a Trefis price estimate of $24.83 for TripAdvisor, which is over 10% lower than the market price on the last close.
Online advertising growth augurs well for TripAdvisor’s RPM
The global online advertising market is growing and is projected to exceed $100 billion by 2014, as more and more advertisers continue to shift their spending from offline to online channels, mirroring the trend in consumer media consumption generally. For travel specifically, International Data Corporation estimates that annual expenditures for global online travel advertising in 2011 were over $5 billion and are projected to grow at a compound annual rate of 15% through 2014.
Given the size of the travel market, travel providers and travel related advertisers will continue to be motivated to devote significant resources to advertise their travel products and services. In addition, as more and more travel dollars are spent online generally, an increasing amount of travel advertising spending is expected to migrate from traditional offline advertising channels to online advertising opportunities. TripAdvisor is well placed to benefit from the trend given its vast user base and rich content. TripAdvisor-branded websites globally received more than 50 million unique visitors in July 2011 (according to comScore) and have built a marketable base of over 50 million reviews and opinions.
Highly concentrated client base
TripAdvisor derives a substantial portion of its revenue from a relatively small number of significant advertisers with Expedia accounting for ~35% of revenue. Expedia is TripAdvisor’s most significant advertising customer in terms of revenue and Expedia currently expects to reduce the percentage of gross profit (on bookings generated from TripAdvisor-sourced visitors) that it pays to TripAdvisor in the future for click-based advertising. This reduction is estimated to reduce TripAdvisor’s annual revenue by approximately 2% to 5%. If TripAdvisor is unable to replace the revenue loss from Expedia through other advertisers, TripAdvisor’s RPM could decline going forward.
Tripadvisor quotes in its S-4, filed with SEC this November:
Our business is subject to certain risks and concentrations including dependence on relationships with our customers. We are highly dependent on our advertising and media relationship with Expedia. In addition, another of our customers accounted for approximately 11% of our revenue in 2010.