This Growth Story Has Just Begun

By Steven Heller - September 17, 2012 | Tickers: EXPE, GOOG, PCLN, TRIP, YELP | 0 Comments

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There is a world of travelers out there and the TripAdvisor (NASDAQ: TRIP) story is just getting started.  Having recently spun off from Expedia (NASDAQ: EXPE), the company stands to become an even greater version of the world’s greatest online traveler community.  The competition is intensifying, but TripAdvisor offers a more comprehensive suite of information than its peers.  They are in position to reap the benefits from the continued rise of valuable user generated content.  Today we’re going to examine what makes TripAdvisor so great and what factors would derail the plotline.

The Business
TripAdvisor makes its money from three sources: click-based advertising (CPC), display-based advertising (DBA), and business subscriptions.  As of the most recent quarter, CPC makes up 77% of total revenue, where DBA makes up 13%, and subscriptions make up 10%.  Each time a user “checks rates” on a specific property, TripAdvisor gets paid for that click.  All areas of their business have grown double-digits from the previous year.

TripAdvisor operates in thirty countries and also owns 19 other travel websites. Between everything, they attract more than 69 million unique monthly visitors.  Their core business, cleverly named, TripAdvisor, attracts more than 56 million monthly visitors.  Each minute, over 50 new reviews are posted to this flagship domain from its 32+ million members, adding to the already 75+ million review archive.      

The Competition
The obvious competitors are other travel, hotel, and leisure review sites that leverage user generated content.  These competitors tend to be fragmented in their scope when compared to TripAdvisor.  That’s because TripAdvisor is the world’s largest global platform for travel-related reviews.  From TripAdvisor, a user can plan nearly all aspects of their trip in one visit.  With competitors, it tends to take multiple sites and the volume of reviews tends to be less.  In other words, there is no other one-stop-planning solution besides TripAdvisor.

Major competitors include search engines like Google (NASDAQ: GOOG), local review sites like Yelp (NYSE: YELP), and travel sites like Priceline (NASDAQ: PCLN).   

Google has been making acquisitions in the professional review space to bolster offerings.  Between Zagat and Frommer’s, Google’s local results are beginning to be backed by professional credibility.  Integrate some user generated content, and you have a serious competitor to TripAdvisor.  If Google wants to get more involved with collecting user generated reviews, they will become a larger threat.  That’s because they have such a large user base to solicit. 

Yelp lacks the scale to compete with TripAdvisor on a global basis.  They offer reviews in only 16 countries and have less than half the amount of total reviews.  Yelp’s focus is local businesses, many of which are outside the scope of TripAdvisor’s business.  The two overlap on restaurants, cafes, and other nightlife outings.  Unless they scale up to reach a more global audience, Yelp will remain a mild competitor at best.  User adoption will also be a challenge in markets where TripAdvisor already has an established presence. 

Priceline has 165,000 hotels to choose from, which sounds impressive until you realize TripAdvisor has over 610,000.  While lacking in sheer numbers, Priceline solicits users to post a review after their stay.  This trend is something to keep a watchful eye on as a TripAdvisor shareholder.           

Areas of Growth
Of the three revenue divisions, subscriptions is the one to closely watch.  It’s the fastest growing, having posted a 59% increase in sales year over year.  It’s fueled by their Business Listings service, which was first introduced in 2010.  A business that helps other businesses make more money is a great thing.  A recent independent study found TripAdvisor’s Business Listing service returned $64 for every $1 spent.  That’s a tremendous return on investment for property owners. 

TripAdvisor’s Business Listing service enables individual hotels to increase exposure to the community.  It allows the business to integrate contact information and add special offers on more highly visible pages.  Subscriptions start as low as $40 per month and scales up based on location and hotel size. 

As of the end of last year, TripAdvisor converted 35,000 businesses to this service.  This accounts for only 6% of the total hotel listings on the network.  They intend to expand their sales initiative while improving features to attract more of their installed base.  This is a potential goldmine for both property owners and TripAdvisor alike.                      

Risks and When to Sell

1. If big boys like Google or Facebook begin leveraging their user bases to begin attracting and accumulating user generated reviews.
    
2. Expedia is currently TripAdvisor’s largest advertising customer.  They made up over 28% of TripAdvisor’s total revenue last quarter.  As a result of the spin-off, Expedia renegotiated its CPC rate downward by 10-15%, pressuring overall CPC revenues.  TripAdvisor was more than able to make up the shortfall, but the term of the new rate only lasts until the end of this year.  The risk here is if Expedia decides to renegotiate their rate even lower for 2013, or decide to drop them all together.  The latter is unlikely, given how Expedia is the largest stakeholder in TripAdvisor.   
   
   
3. If Expedia begins selling a significant portion of its 120+ million share stake in TripAdvisor, which they acquired as a result of the spin-off.
   
   
4. In connection with the spin-off, Liberty Interactive Corporation and Barry Diller, the Chairman of the Board, effectively control 62.4% of the voting power.  Watching their actions may provide clues how things are shaping up at TripAdvisor. 

Bottom Line
Investors should find comfort in TripAdvisor’s business.  Each division is growing in the double-digit range and overall profitability is strong; gross profit margin sits high at 98% and net profit margins are comfortably insulated at 25%.  Their biggest growth prospect is converting more businesses to sign up for their Business Listing service.  Given its track record of success and testimonials, that shouldn’t prove too difficult.  They are also well positioned to capitalize on the increased volume of user generated content and reviews.  Even with increased competition, TripAdvisor is still the world’s largest and greatest travel platform.  And that isn’t going to change anytime soon. 

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