Is Trip Advisor's Growth Story Just Getting Started?
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Trip Advisor (NASDAQ: TRIP) spent little time celebrating its first few months as an independent public company. Instead, the travel research site was busy crafting an impressive ecosystem in the online travel space.
Investors responded to the positive results of that effort by bidding shares up by nearly 20 percent on Wednesday. In the short time since the company's spin-off from Expedia (NASDAQ: EXPE), TRIP's stock has surged over 60 percent. With dramatic moves like that, it's fair to ask if the company's growth has peaked, or if this trip is just getting started.
The Preparation
TRIP undeniably made some impressive progress in building momentum toward that "virtuous cycle" of user-generated travel content leading to more engagement, leading to more users, leading to more content.
In that vein, here are a few of the key wins that the company announced in its first quarter results (pdf):
- Reached 60 million reviews and ratings from users.
- Deepened and extended Facebook integration to over 120 million users.
- Increased syndication and licensing of content including to a new partner, Wyndham Hotels.
- Surpassed 17 million downloads of the company's mobile app.
In terms of crafting a robust ecosystem of highly engaged users supplying reviews on the one side -- with motivated hotel, airline, and restaurant merchants seeking business and positive reviews on the other, you couldn't have asked for a better quarter.
Looking ahead, the company can also expect international sales to play a key role in growth. TRIP's revenue is still dominated by domestic sales -- which made up 52 percent of sales in the quarter -- leaving the company plenty of room to expand toward the 80 percent in international sales that is traditionally booked by Priceline (NASDAQ: PCLN).
Trends in the travel industry look favorable to TRIP's growth, too. As airline ticket prices continue to climb, TRIP's advertising business model should benefit from the "increased shopping behavior" that has forced travel sites like Priceline and Orbitz (NYSE: OWW) to increase marketing spend while chasing after travel bookings. A growing middle class in emerging markets, meanwhile, looks to lift all boats in the industry as the travel market expands and continues its migration online.
The Payoff
Positioning itself to take full advantage as travel search becomes more social and more mobile, TRIP has been working to build up critical mass, with the ultimate goal of capturing more and more advertising dollars from Google (NASDAQ: GOOG). After all, every one of those 17 million downloaded apps represents another user that can search for flights, hotels, and restaurants outside of the reach of the gorilla of desktop search.
While we're still early in the game, results so far are trending well for the upstart. Click-based advertising, where TRIP derives most of its revenue, was up 20 percent this quarter, helping net income surge over 100 percent.
The Jetlag
But it hasn't been all smooth travel for TRIP. Selling and marketing expenses grew faster than revenue last quarter, and nearly set a new high as a percentage of revenue. That's surprising, given that the increased user base and Facebook integration should be leading to more organic growth. While too early to say what this bump in spending means, it's true that if TRIP can't continue to bring more people into its ecosystem in a cost-effective way, the entire growth model is at risk.
The company's separation from Expedia also complicates the growth picture. TRIP still relies on Expedia as its single largest advertiser. Under terms of the spin-off agreement, Expedia will be paying a lower rate on purchases from TRIP in 2012, putting a drag on revenue growth that the company will have to make up elsewhere. The split from Expedia also entails substantial costs that have to work their way through to TRIP's bottom line in the coming quarters.
But the main roadblock I see for TRIP -- and it's a big one -- is Google. The online travel market touches local businesses and a wide range of global merchants. It's hard to imagine Google ceding that ground to anyone without a fight. In fact, Google already dipped its toes into airfare search and is now tinkering with a new "hotel finder" service that promises at least as much functionality as Trip Advisor's.
Bottom Line
Still, a powerful suite of mobile apps that combine social sharing with deep Facebook integration can go a long way toward sustaining early growth for a disruptive business like TRIP. Just look at Zynga's early days for an example of that cycle at work.
TRIP has a solid lead building out a compelling ecosystem around travel research that will make it hard for even deep-pocketed competitors to wrest its users away. And the company's international sales have plenty of room to expand. As far as growth goes, then, I think this trip's far from over.
Demitri writes about stocks and investing at his blog, Sigma Swan.
SigmaSwan has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Priceline.com. Motley Fool newsletter services recommend Google and Priceline.com. 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. If you have questions about this post or the Fool’s blog network, click here for information.
