1) Summary

  • TripAdvisor has many traits of a successful business despite the dip in its share price.
  • While the business faced many headwinds during the recent quarter, it has invested strategically so as to expand its offerings.
  • Deteriorating financials does pose some risk while diversification in revenue streams are expected to give the business a much needed boost.
  • The business continue to delight its customers and partners which is crucial for success.

2) Introduction



Since hitting its peak of more than $86 per share since 30 December 2015, TripAdvisor (NASDAQ: TRIP) has come tumbling back down to the range of $50 to $70 per share and has yet to take a roundtrip back ever since. After reporting less than stellar earnings on Wednesday, shares fell by 7% as investors showed their displeasure and impatience toward the stock.

Should we be concerned if we are holding shares right now?

If we plan to initiate a position, would now be a good time to buy?

I’m sure many investors are wondering if this company will ever pick up. As for me, the best stock to buy may be the one you already own. Yes, I bought more shares of this wonderful company and here is why you may consider that too.

3) Traits of a Successful Business

I see in TripAdvisor many qualities of a successful business:

1. Growing cash flow (operating cash flow and free cash flow up 19% and 23% respectively)
2. A huge network of users (average monthly unique visitors of 350M and 385M reviews and opinions) which will strengthen its network effect
3. A management team that is “operating the business with a long-term forward-looking view”

4) Business Overview

The company focuses on primarily travel reviews and makes money by selling advertisements against the content. To enhance the consumer experience, it has rolled out a booking service to take market share from other online travel agents (OTA) while also leveraging on the upward trend of mobile usage.

We can focus on the negatives from the most recent quarter all day long: sales falling from $405 million to $391 million, operating income down almost 40% from $48 million to $79 million and earnings per shares plunging by 42.5% from $0.40 to $0.23. However, these losses in earnings need to be put in the proper context.

Click-based advertisement, which is the company’s main source of revenue, decreased by 15% to $201 million which in turn leads to lower profits. Another reason why the company isn’t making as much money is because it is reinvesting heavily back into the business. TripAdvisor has been putting up with plenty of competition lately and it makes sense for the business to invest into its technology and also its marketing. However, if the increment of these costs continue at this rate, the company’s profit will continue to chip away.

5) The Power of Instant Booking



TripAdvisor recently launched its “Instant Booking” platform in every country that is has a foothold in. This move is a very powerful one because it solves a problem that consumers face. If you need to do research about a vacation or a restaurant on one site and make reservations for it one another, the experience can be very disorientating. Also, TripAdvisor loses out when a user makes a booking on another site without clicking its links to a hotel or OTA. Hence, the company believes that Instant Booking will result in a more satisfying user experience and in turn, stronger relationships with its partners which would lead to more monetization.

The company’s management is also keen on expanding its product offerings. TripAdvisor has been making moves to allowing its visitors to book their air tickets, restaurants and even activities on its site. The challenge here is that visitors are moving away from larger screens to smaller ones and commission per click (CPC) on smaller screens bring in a smaller amount of revenue.

Ultimately, we need to see if the company is able to navigate this transition from PC to mobile, monetize its Instant Booking platform and expand its offerings in order to earn non-hotel commission.

6) Financial Risks

At this point, most investors would agree with me that TripAdvisor’s financials aren’t as attractive as before.


Source: Author

Return on invested capital (ROIC), which measures how well a company generates cash flow relative to the capital it has invested in its business, has been deteriorating since 2013 (30.24%) to 2016 Q2 (14.81%). What’s more alarming is that the company’s weighted average cost of capital (WACC) has more than doubled from 10.06% to 22.25% during the same period. TripAdvisor earns a return (14.81%) that do not match up to its cost of capital (22.25%) and thus, would destroy value as it grows.


Source: Author

While TripAdvisor’s gross and free cash flow margins moved slightly lower, the company’s operating margins have fallen from 31.11% to 10.43% over the last 3 years. Operating margins are frequently used to measure if a company is holding up well against competition and clearly, TripAdvisor is taking quite a hit here.

7) Threat from Competition



Google (NASDAQ: GOOGL, GOOG) announced in 2011 that it has entered the online travel space as well. And why wouldn’t it? It has a treasure trove of near-limitless user information which will enable it to craft the ultimate user journey from the moment you decide to search the travel experience itself. This year, it has announced that it has launched Destination on Google.

The question here is how Google will post a threat to TripAdvisor.

TripAdvisor relies on search to get traffic onto its site. The problem here is that Google can now undermine TripAdvisor by placing its products first. This will likely put pressure on TripAdvisor’s margins as the company will have to keep spending on marketing to put itself in front on more users. The future here can seem quite bleak for TripAdvisor because Google is moving towards providing a complete experience as well. More time is needed to see how this will play out. For the moment, I’m not concern about Google for the time being as TripAdvisor has recently partnered with hotels to allow booking to be done on its site.

8) Conclusion

Every investment we make will have its shortcomings and TripAdvisor is no exception. Now, TripAdvisor needs to focus on monetising its Instant Booking and move away from non-hotel revenue at the same time.

One advantage we have as investors is that we are also consumers of various products and services. As I enjoy shopping and visiting cafes around Singapore, I’ve noticed TripAdvisor’s logos on many shops and that alone speaks volumes about the business. This trend will not reverse anytime soon and we need to be patient with how the business is developing while we add to our positions.

With more partners and users coming on board its site, TripAdvisor has placed itself in a unique position to disrupt the travel industry like never before.

If you want to learn more about how to find cheap and good stocks to generate passive income for you, click on the picture below to join our Free Value Investing Masterclass.


Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy


Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

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