Time To Get Aboard TripAdvisor?

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

TripAdvisor (NASDAQ: TRIP) was pushed down as much as 7% last week over concerns that growth in costs would outpace revenue growth for 2013The travel company released fourth quarter earnings results that beat expectations, but the company's 2013 guidance included "costs that may well increase quicker than revenues in 2013."

Concerns about full-year costs are overshadowing the better-than-anticipated fourth-quarter earnings, but is the worry overdone? And could investors use this as a chance to get into a niche travel industry stock? 

TripAdvisor spun off from fellow online travel site Expedia (NASDAQ: EXPE) in 2011. Expedia is still TripAdvisor’s largest customer, accounting for over 30% of revenues. This is an inherent risk and something of a disadvantage for the company. However, the spin-off has been a quid pro quo of pressures for both companies, where without TripAdvisor, Expedia’s revenue diversification is limited and the company’s spending on advertising is expected to rise. 

The uniqueness behind TripAdvisor's business model includes the fact that has a fundamentally different business model from the other travel websites that it gets grouped in with. The majority (+90%) of TripAdvisor's revenues are generated from the sale of digital advertising. As far as the conventional travel websites, Priceline (NASDAQ: PCLN) and Expedia are the undisputed industry leaders, as measured by revenues:

<img src="http://media.ycharts.com/charts/a9d7d43caf426cb807e639e7037a778c.png" />

Priceline's recently announced acquisition plans to snatch up Kayak will only further separate Priceline from runner-up Expedia. As far as recent performance, for the past twelve months TripAdvisor and Priceline have under-performed their major peers: 

<img src="http://media.ycharts.com/charts/bbc7a79c2602de9a726e48ef9e958da7.png" />

Of the two underperformers, Priceline might be the better bet for now. Priceline has solid international exposure, with 50% of revenues generated internationally, and the company is making strides to break into Asia with its Agoda and Ctrip acquisitions. 

TripAdvisor's plans for the  future include increasing its mobile and social presence (see if TripAdvisor is one of the top 4 internet companies). Part of this includes upping its expenditures on marketing, which is expected to move from around 35% of revenue in 2012 to 45% in 2013. Also boding well for TripAdvisor is its dozen acquisitions since 2006, which have been focused on mobile and social. But are these initiatives enough to outweigh the poor revenue diversification and dependence on advertising? Let’s see how TripAdvisor stacks up to its peers on a valuation basis--it does appear to be a bit expensive...

Price to Earnings (next yr. earnings)

  • TripAdvisor 20.5x
  • Orbitz 11x
  • Expedia 15.8x
  • Priceline 18.8x
  • Kayak Software 36.3x

TripAdvisor trades at the high end of the industry, and what's more is that TripAdvisor's debt load is on the high end as well:

Debt Ratio

  • TripAdvisor 35%
  • Orbitz 39%
  • Expedia 17%
  • Priceline 22%
  • Kayak Software 0%

Don't be fooled

TripAdvisor has an inherently different business model, acting more as a social review site, something akin to Yelp for travel destinations, rather than a conventional travel booking site like Expedia. Even so, I still cannot find enough conviction to recommend investing in the stock. A couple of top hedge funds were selling off their stakes during the fourth quarter; both SAC Capital (check out SAC's new picks) and Maverick Capital sold off 60% of their shares (see all hedge funds owning TripAdvisor). The stock even appears expensive from a takeover perspective. The Priceline buyout of Kayak is at a 4.88 EV/Sales multiple, but such a multiple on TripAdvisor's TTM revenues would suggest the company is overvalued by upwards of 65%

mhargra has no position in any stocks mentioned. The Motley Fool recommends Priceline.com and TripAdvisor. The Motley Fool owns shares of Priceline.com and 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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