3 Web-Based Businesses That Profit From Leisure
Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
You travel, you dine out, you take pictures… you spend money. This is my list of Internet services related to leisure activities: TripAdvisor (NASDAQ: TRIP) is used for voyages, OpenTable (NASDAQ: OPEN) is used to eat out and Shutterfly (NASDAQ: SFLY) is used to keep the memories alive. These three companies beneficiate from increasing disposable incomes around the world and an ever-growing use of the Internet as a research, reservation and retail option. The companies therefore offer plenty of upside for investors, for the years to come. Below you will find a succinct analysis of why I believe that these firms offer good long-term investment opportunities beyond their valuations.
TripAdvisor: Online travel agency
TripAdvisor is an online travel agency and research company that operates worldwide under different web domains. The website’s main differentiator and attractive is its review database that comprises over 60 million user opinions on travel related issues. By centralizing a wide array of services, the firm has put together a hard-to-match offering that results in over 50 million users visiting the company’s websites each month. With so many users willing to spend money traveling, revenue sources are varied and range from advertising to travel vendors and agents like Experia.
Although the company is expected to perform weakly over the next couple quarters while it finishes itstransition to the meta-display feature, several other elements should drive growth in the longer term. Namely, a strong brand name and client base; a constantly growing review base and product offering; and a renewed user experience. The mobile segment should also contribute to revenue growth in the years to come, although hefty investments will impact on short-term profitability.
Additionally, the increasing travel-related Internet traffic, corporate spending on advertising and use of the Internet in emerging countries -especially in Asia-Pacific and Latin America- should provide further growth opportunities.
Although overvalued in relation to its industry, I'd recommend BUYING and holding on to this stock, since analysts expect TripAdvisor outperform its peers’ earnings-per-share growth rates comfortably. Offering great returns, margins and cash generation capabilities (about 30% of revenue is converted into free cash flow each year), this company should deliver plenty of upside for those willing to wait.
Shutterfly: Social & personal services
Shutterfly is an “Internet-based social expression and personal publishing service that enables consumers to share, print and preserve their memories” (Morningstar). With a market capitalization of $2 billion, this company has been catching the eye of investors for a few quarters now. Two factors have dissuaded many from buying this stock lately, however. First off, its valuation: trading at 98 times its earnings, these shares look quite expensive. In the second place, its weak guidance for the 2013 fiscal year discourages most short term-investors.
Nevertheless, long-term prospects look pretty promising: analysts expect earnings per share to grow in the 16% to 20% range each year over the next five. There are several other reasons to feel optimistic about this company and to BUY AND HOLD its shares as well.
Over the next few years, its revenue and earnings should continue to grow on the back of its market leading position and constantly expanding client base. Several acquisitions will also help diversify Shutterfly´s product offering, helping attract a wider array of customers. Some of the most recent purchases include Kodak Gallery´s online photo services, Fuji Film´s SeeHere.com photo-sharing website, Penguin Digital and WMSG. Strategic partnerships will play an important role in future growth as well, as proven by those with Groupon, Best Buy, Target and Walgreens, among others.
Diversification will also come from within; several initiatives, like Treat, its one-to-one greeting card service, and mobile-related services, are also expected to deliver plenty of additional revenue.
OpenTable: Restaurant services
OpenTable is the world’s leading company in two industries: online restaurant reservations, and booking, table management and guest administration software for restaurants. With restaurants increasingly recurring to technology looking to cut costs and better manage its reservations and customer traffic, a bright future seems ahead of this company. Analysts expect it to surpass the industry average earnings-per-share growth by roughly 50% over the next five years, delivering an annual rate of 21% to 22%.
One of the firm’s main advantages stems in its lack of serious competition. Being the most popular reservations website by far and offering an ever-increasing traffic, a network effect constantly attracts new restaurants to hiring OpenTable’s services. This effect has been particularly important for its U.S. business, which already holds about 1/3 of the market share.
Going forward, the increasing use of mobile phones should provide higher traffic, which added to cost cutting initiatives will make the service more and more attractive for restaurants.
International markets provide further growth opportunities, especially within Europe and Asia. However, increased competition in these geographies will make it harder for OpenTable to successfully attain the network it holds in the U.S.
Although some are concerned about rising competition, particularly from Livebookings, what really discourages me from buying this stock is its valuation. Trading at 53 times its earnings, it roughly doubles the industry average valuations. However, I would recommend keeping a close eye on how OpenTable develops; a better valuation could create a highly attractive entry point for long-term investors.
Although all three companies seem to offer compelling long-term growth prospects, OpenTable’s valuation dissuades me from recommending a buy. Shutterfly, however, is also valued above its peers but still stands as a buy case due to its upside potential and expected growth for the years to come. Finally, TripAdvisor stands just in between. Its valuation looks a little more moderate but its future, still very bright; holding two of the strongest brand names in the internet (and fairly moated business models), both Shutterfly and TripAdvisor seem poised to deliver double-digit earnings-per-share and revenue growth over the years to come. I’d say, buy and hold.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends OpenTable and 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!