2023-06-29 06:39:56 ET
Summary
- Tripadvisor is an online travel company that offers travel guidance products and services globally.
- Revenue has grown at a CAGR of 7%, driven by the digitization of the travel industry.
- TRIP has seen a rapid deterioration of margins in the last decade, as competition has increased and monetization opportunities are lacking.
- TRIP stock is currently trading within proximity to Booking.com, which to us implies a lack of upside.
- Given the rapidly improving near-term growth, partially due to the last remnants of the Covid impact, we will see EBITDA growth in FY23. For this reason, we rate TRIP stock a hold.
Investment thesis
Our current investment thesis is:
- Tripadvisor is a quality service that will support the company's growth through shared marketing.
- Growth and margin outlook is materially uncertain as the business transitions into the post-Covid period.
- Viator (and potentially subscriptions) will potentially support growth and margin improvement, but again, it is too early to speculate as it remains high growth and loss-making.
- TRIP is currently trading at a 2x EBITDA multiple discount to Booking.com, which is a far superior business.
Company description
Tripadvisor ( TRIP ) is an online travel company that offers travel guidance products and services globally.
The company operates in three segments:
- Tripadvisor Core segment provides travel guidance platforms for travelers to explore, create and share authentic user-generated content in the form of ratings and reviews.
- Viator segment is a pure-play experiences online travel agency that assesses businesses and allows travelers to find and book tours, activities, and attractions from experience operators.
- TheFork segment offers an online marketplace that allows diners to find and book online reservations at restaurants.
Share price
Trip's share price has lost over 50% of its value in the last decade, as changing profitability and softening growth have scared investors.
Financial analysis
Tripadvisor financial performance (Tikr Terminal)
Presented above is TRIP's financial performance for the last decade.
Revenue
Trip's revenue has grown at a CAGR of 7% despite the impact of Covid-19, reflecting what has been a strong decade for travel. The underlying annual growth rate, however, is less impressive. Before the pandemic, the company experienced a 4-year stagnation, with less than $100m of new revenue generated.
This is likely driven by increased competition, in what has been a rapidly growing market. Further, there has been an increase in the forms of information exchange, with YouTube and other outlets increasing in popularity. Looking at Google ( GOOG ) trend data, the company's popularity peaked between 2013-2015 (same time as revenue growth slowing), before experiencing a sustained and continuous decline.
Tripadvisor interest (Google Trends)
Regarding the booking of activities, we have seen the rise of online travel agents as an alternative to traditional outlets. With a more focused product offering, these businesses have outgrown Trip. This is reflected in consumers' "related topics", which suggests they are making decisions with Tripadvisor and booking elsewhere.
Related topics (Google)
This has all been driven by the digitization of the travel industry. Mobile/online booking and planning is now the norm, with reduced usage of "in-person" services. This is overarchingly bullish for Tripadvisor, as the company has been able to exploit this to gain market share of digital traffic. The company is incredibly popular as an information tool and has garnered a strong social media following. As a regular traveler, I can say first hand it is the go-to site as it benefits greatly from the network effect, making competing with the company difficult.
This being said, it's difficult to see what the end goal is. We struggle to see how this leads to an attractive profitability profile alongside growth as the ability to monetize the primary product is limited.
Management seems aware of the problem, having attempted several strategic pivots, including launching a subscription model and acquiring a range of businesses. They are currently focused on growing "Viator" and "TheFork", leveraging the traffic to Tripadvisor. Both businesses monetize transactions, be it holiday experiences (Viator) or Restaurant bookings (TheFork). Both these companies are growing well and increasing their share of Trip's revenue, however, the route to profitability is uncertain. Having assessed both sites, they are good. The issue is that nothing groundbreaking or revolutionary is being provided. The companies are thus competing with a host of other players, including some which have a far larger market share. We are more bullish on Viator, as this segment is more fractured and works well in conjunction with Tripadvisor (Although we want to see it in Tripadvisor's related topics to suggest the cross-marketing is working). TheFork, however, is competing directly with OpenTable and lacks cross-selling opportunities. Both businesses are currently at the peak of their popularity, which suggests growth will continue.
Viator (Google trends) TheFork (Google trends)
Economic considerations
Current economic conditions could pose short-term headwinds for the business. As inflation remains high and rates elevated, consumers are seeing experiencing a rise in living costs, which is contributing to reduced discretionary spending. This has the potential to slow travel, which would reduce traffic to Tripadvisor and bookings on Viator.
Margin
At the start of the decade, Trip boasted quite impressive margins, however, these have subsequently been diluted.
This is a reflection of increased competition, contributing to greater S&A spending. Currently, Trip is spending 64% of its revenue on S&A, and a further 15% on R&D. These levels are far too high for an attractively profitable business. This is a reflection of what is the current business model, spending $0.78 to make a dollar.
Q1 results
Presented above is Trip's most recent earnings. Growth remains resilient, with a 42% increase compared to the same period in FY22. This suggests any fears of revenue decline is, at a minimum, premature. Further, Viator is rapidly growing, suggesting the business is findings its feet specializing in activities.
A portion of this is potentially China's economy opening up, as the country ended its zero-covid policy in late 2022 and has now seen the pack of the pandemic. This should push performance further into Q2 if the response from China is similar to the West.
Further, we are still seeing a return to "normal" travel in many geographies, and so it is difficult to disaggregate what is genuine growth in business, and what is "returning" customers.
Balance sheet
Despite the questionable margins, Trip continues to generate a substantial amount of cash. This has allowed the company to remain in a net cash position while funding share buybacks. Although we do not expect a significant increase, these should be sustainable.
Valuation
TRIP is currently trading at a 15x LTM EV/EBITDA ratio and 1.3x revenue. This is an appropriate position for a moderately profitable mature business or a growth business with material questions around profitability. Trip is neither of these businesses in our view.
Although Q1 looks fantastic, we believe it is premature to suggest growth is back for good. The business needs to illustrate consistent Y/Y gains. Margins are also a concern. A return to c.15%/c.7% (EBITDA-M/NIM), with growth, would be highly attractive, and in our view imply a valuation high-teens valuation.
With the company's share price near an all-time low, many have suggested this implies upside. We disagree. Booking.com ( BKNG ) currently has an EBITDA-M of 31% and has grown Revenue at a CAGR of 7%. The company's current valuation is 17x EBITDA, only 2x more than Tripadvisor. We rate Booking.com a buy and at the current price, is a far better option to gain exposure to travel and hospitality.
Final thoughts
Tripadvisor is a fantastic website that is useful to millions of people globally. The service itself does not have scope to generate impressive returns but Management has taken the correct decisions to exploit their advantage. We think Viator can leverage the Tripadvisor platform to generate profitability, but it remains early in its development. Subscriptions also have the opportunity to be highly profitable, but again, we are talking long into the future. Currently, the company is a barely profitable business with no certainty over where growth and margins will land in the medium term.
With near-term growth looking good, we will see Trip's trading multiple contract if markets do not react. That would push the business into attractive territory in our view, as the delta to Booking.com will increase. Further, markets may react positively to the earnings growth, again reducing downside risk. These factors keep us from initiating at a sell.
For further details see:
Tripadvisor: Uncertainty Around Margins Suggests Patience