20% Growth And No Significant Competition

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

TripAdvisor Inc. (NASDAQ: TRIP), the self-proclaimed “world’s largest online travel company,” has done well for several years now.  Since being spun off from Expedia (NASDAQ: EXPE) in late 2011, shares have climbed from their IPO price of $27.50 to the current level of just over $46, a nice gain of 68% in just over a year.  While the company has done a great job of growing its revenue, does the company have more growth in the works?  When TripAdvisor reports 2012’s earnings on Wednesday Feb. 13, investors will hear the latest updates on what the next chapter in this growth story may be.

The Company

TripAdvisor’s basic function is to gather reviews from travelers about hotels, restaurants, and other destinations around the world.  As mentioned before, TripAdvisor was formerly a segment of Expedia, which is significant for a not-so-obvious reason. 

TripAdvisor derives a solid 92% of its revenues from paid advertising, and Expedia remains their largest customer, accounting for 33% of total revenues last year.  Just for an experiment, I went to TripAdvisor and searched for reviews on a restaurant down the street from my house.  The big banner ad was Hertz, and all of the major travel sites were listed to search prices using TripAdvisor’s “check rates” feature, with Expedia as the top name on the list.

As far as the advertising revenues go, the majority (78%) comes from click-based advertising, including the aforementioned “check rates.”  Display advertising, mostly from travel providers, accounts for only 14% of the company’s revenues.

I, for one, would like to see TripAdvisor become a little less dependent on Expedia, and a decline in this percentage would be welcome news for investors.  For now, however, the performance of these two companies remains interconnected.  When Expedia is doing well, they have more money to spend on TripAdvisor.  When TripAdvisor is doing well, more people get directed to Expedia.

Growth and Valuation

The company plans to grow by investing its capital and resources through optimizing their technology, particularly for mobile devices.  Mobile ads seem to be the Holy Grail for internet companies these days, so pay attention to the company’s progress on optimizing their mobile experiences.  They have also implemented integration with Facebook and Twitter, allowing users to see what restaurants and hotels their friends are reviewing, which I have to say makes the whole experience much more fun!

TripAdvisor has more than doubled its revenue since 2008, and is expected by analysts to grow revenues by 17% annually for the next several years, which certainly justifies the 30.7 times earnings the stock trades for.  When the company reports next Wednesday, they are projected to announce that they earned $1.51 per share for the year. 

More important than the earnings numbers themselves is the growth, and the company’s outlook going forward.  Consensus estimates call for earnings to grow to $1.82 and $2.17 over the next two years, growth of 20.5% and 19.2%, respectively.  With 20% earnings growth and a solid record of revenue growth already, TripAdvisor sounds like a very attractive growth play for the next several years.

Competition?

I was trying to find peers to compare valuations with, and most advertising-based internet companies of similar size and age don’t compare.  Most don’t have earnings yet; for example, I looked at Angie’s List (NASDAQ: ANGI) because it is also a site based on user reviews, but they are not forecast to even turn a profit for another few years, putting them in a whole other category of “speculative.”  Don’t get me wrong, I like Angie’s List as a concept and as a business model, but they are just not a mature enough business (read: profitable) to warrant a long-term investment recommendation.

Conclusion

To sum it up, I like TripAdvisor for its strong base of advertisers, great revenue growth, and the fact that it is profitable and is forecast to stay that way.  It also helps that they have very little in the way of direct competition.  With the company’s gross margins of over 98%, I feel very confident in its ability to turn a profit, as long as they master the mobile experience and continue to be ambitious when it comes to growth.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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