TripAdvisor (NASDAQ:TRIP) is the world’s largest travel review website with a database of over 100 million user reviews and opinions on accommodations, restaurants and activities. It is present in 30 countries across North America, South America, Europe and Asia. Since its spin-off from the Expedia (NASDAQ:EXPE) in December 2011, its stock price has risen significantly from $27 to above $60 currently. The decision to go for a spin-off has helped TripAdvisor unlock its value considering the difference in nature of the two businesses.
In this article we provide a snapshot of how TripAdvisor makes money, the important segments that contribute to its business and the key trends that impact its valuation.
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Who Are TripAdvisor’s Key Customers? How Does The Company Make Money?
Travelers are increasingly depending on word-of-mouth and online reviews before making a travel purchase. Reviews and opinions posted by users on TripAdvisor’s website help travelers make informed decisions and plan their trip accordingly. The company does not charge users, thereby providing free and easy access to a large number of reviews.
TripAdvisor derives the majority of its revenue from click and display-based advertising, and the former constituting a higher proportion of advertising revenues. Advertisements from OTA’s, hotels, airlines and cruises are accepted under both formats while those from casinos, resorts and attractions are accepted only under the display-based format. The combination of subscription based offerings on the company’s Holiday Lettings and FlipKey websites is the other source of revenue.
What Are The Important Segments That Contribute To Its Growth?
TripAdvisor’s revenue has grown at a rapid pace since 2008. The company made over $760 million in 2012 and earned 45% operating profit on the same, which is constant across its business segments. Display and click-based advertising account for close to 90% of TripAdvisor’s revenue with the remaining (<10%) coming from subscription fees. We expect the company’s revenue to triple by the end of the forecast period.
The company’s ever expanding user base is the main driver behind its rapid growth. Its user traffic (number of unique visitors per month), which has increased from 32 million in 2008 to over 200 million currently, attracts advertisers to its website. We forecast the figure to cross 300 million by the end of our review period.
Historically, TripAdvisor’s profit margin has remained above 50%. However it declined to 45% in 2012, as the company made incremental investments on mobile and social platform integration, and international expansion. Over time, we expect such expenses to come down, leading to an improvement in operating margins.
Current Trends That Impact TripAdvisor’s Valuation
1) Growing Global Internet Penetration And Online Ad Spending
The U.S. and Europe, the two primary markets for TripAdvisor, have the highest Internet penetration rates worldwide with over 60% of the population having access to the Internet. Although, penetration rates in emerging market such as Asia-Pacific and Latin America are below 30%, this will increase rapidly in the coming years. The company’s vast international presence with TripAdvisor branded websites in 30 countries and 21 languages puts it in a strong position to expand its user base looking ahead.
Advertisers are increasingly moving online. According to eMarketer, worldwide online ad spending is expected to increase at CAGR of over 12% to reach $163 billion by 2016, from $103 billion in 2012. We expect TripAdvisor to register robust growth y-o-y considering that TripAdvisor derives around 90% of its revenue from advertising.
|Advertising Revenue ($Mil)||682||826||1081||1319||1502||1663||1834||2002|
2) Social Media & Mobile Platforms
Given the popularity of social media and the proliferation of mobile devices, travel companies are increasingly looking to reach these users. Recognizing this, TripAdvisor entered into a partnership with Facebook in 2010 to launch its application on the social networking website. With over 30 million users every month, TripAdvisor’s Facebook application is one of the most popular applications on Facebook, as per AppData. TripAdvisor continues to leverage its partnership with Facebook by launching new features that will help it increase user traffic. 
TripAdvisor has also invested heavily in its mobile platform. It announced the launch of its mobile website in March 2010 and has since added apps for the iPhone, Android, Nokia, Palm smartphones, as well as the iPad. It has also acquired several mobile app companies, such as SeatGuru, GateGuru and Tiny Post, which experience high user traffic. TripAdvisor has around 60 million monthly unique mobile device visitors to its website, and as of March 2013, it has seen over 35 million cumulative mobile application downloads for its TripAdvisor, City Guides, and SeatGuru apps.
3) Improving Macro Conditions Fueling Travel Demand
Despite a slow recovery in the global economy, travel demand has remained robust. As the economy recovers further, traveler demand should rise. eMarketer forecasts worldwide total travel sales to increase from $960 billion in 2012 to about $1,130 billion by 2016, and the firm also estimates the share of online travel sales in total travel sales to increase from about 40% to 46% during the same period.
4) High Degree Of Competition
With a large number of agents and suppliers, the travel market is highly fragmented and competitive. Low barriers to entry in the industry further add to the competition. In the travel review business, TripAdvisor faces competition from sites such as Yelp and HolidayCheck. In addition, it competes with online travel agencies such as Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN) that also solicit reviews from travelers who book travel on their websites.
Moreover, companies such as Google (NASDAQ:GOOG) are leveraging their vast networks of user bases and competing more directly with TripAdvisor by attracting and accumulating user-generated travel reviews and opinions, thereby diverting visitors away from TripAdvsior. Thus, we expect the number of page visits per user to slightly decline in the future.
A new arena where travel companies are trying to establish themselves is meta-search. While Priceline and Expedia entered the space via acquisitions of Kayak and Trivago, respectively, TripAdvisor is depending on in-house development of meta-search features. It has offered a flight meta-search feature since 2009, and recently launched a new hotel meta-search feature across the globe in 2013.
We expect rising global Internet penetration, the growth in online ad spending and improving macro conditions to drive the company’s growth. However, a lack of monetization strategies for its growing mobile channel and increased competition from OTAs and search engines with large network of user bases can mitigate its growth. Our price estimate of $54 for TripAdvisor is around 5% below the market price.Notes: