TripAdvisor Stock has Taken a Long Vacation, Ready to Work Again?

TripAdvisor TRIP is the world's largest travel company in terms of average monthly users, members, reviews and opinions, and arguably in terms of a network affect. This might come as a surprise to many investors, thinking that Expedia EXPE or Priceline PCLN are much bigger. That is indeed true in terms of market cap, revenues, and profits; but it is this disconnect in between network/web presence and financial metrics that could produce opportunity.

Expedia and Priceline have market caps of $22.5B and $93B respectively, while TripAdvisor is a much smaller $5.3B. This makes TRIP a tasty possible acquisition for either of these companies, but will leave that discussion for another day. Interestingly, TRIP was spun out of Expedia in late 2011, so there is certainly a history between those companies.

Up until very recently TRIP had a completely different business model than either of the other travel companies. While EXPE and PCLN have always been online travel agencies which help travelers actually book air travel, hotel rooms, and rental cars, TRIP took a different approach. Until 2015, TRIP exclusively acted as a review, information, and ranking site for worldwide travel. They focused on giving traveler's unmatched information in the form of photos, tips, and reviews of restaurants, private tours, hotels, and attractions around the world.

Many travelers found this information invaluable and the thought of planning a trip without the use of the site was unthinkable. Count myself among one of those travelers. This had the effect of making TRIP extremely important for boutique hotels, bed and breakfasts, local attractions, restaurants, and local tours.

A previously tiny unknown restaurant in a small town in Colombia could be turned into a worldwide destination that you have to book months in advance with the right combination of TripAdvisor reviews and photos.

Certainly from a ‘real world' standpoint TripAdvisor seems to have almost ubiquitous power and influence regardless of country or destination; as a majority of the 7 million restaurants, hotels, and attractions that are TRIP members sport TripAdvisor stickers and awards prominently in their properties.

The combination of this ‘real world' power and influence along with an established online presence, reputation, and network seems ripe for significant monetization. The current level of TripAdvisor monetization (majoritively derived from hotels, with a growing amount from restaurants and local attractions) sits at roughly $3 in revenue per monthly user, with market cap per user around $10.9. Both of these figures are low compared to other companies in the industry and for most internet information websites in general.

Other internet information companies' market cap per user ranges in the $15 to $100 range. Facebook is near the top of the list with Yelp near the bottom. These lackluster metrics for TRIP can point to subpar management, inferior online assets, or some sort of shorter term issue. I am confident their ‘asset' is world class, which leaves either poor management or a one-off issue as the culprit, as the overall online travel industry seems to have many years of substantial growth in front of it.

We believe the main issue is the transition of business model from pure advertising/referral based to a combination of their traditional lines and actual direct online booking. This transition has been painful in terms of growth, profit erosion, revenue stagnation, and stock price over the past 3 years.

That being said, we think the worst in terms of this pivit will come in 2017; and assuming no recessions the business model change/improvement should help the company going forward. With TripAdvisor's large embedded network driven to the site for reviews, information, and photos they have a substantial pool of travelers to tap for their instant booking feature. It has yet to be seen if this will work, but we are optimistic. To further push their new features, TripAdvisor is launching a TV advertising campaign later this year.

You may be thinking, that's all great, but do they make any money doing this? That is a good question as many internet companies do not have any meaningful net income or free cash flow; Twitter, Snap, and Yelp among them. However, TripAdvisor currently produces around $250M in free cash flow or $1.70 per share. Before the transition to their new business model this figure reached $306M or $2.10 per share in 2014. It is rare these days to find a financial healthy, dominant internet company with the potential for long term double digit growth trading at 22x free cash flow (roughly in line with the SP500).

The largest risk to the bull thesis would be a move into the space by Amazon or more likely Google, but this competition risk is almost always present in the technology sector. There is still some risk in the transition of business model, but we believe that to be more a time risk than a ‘success' risk.

Eric Mancini, CFP, CAIA is the director of investment research and a wealth advisor with Traphagen Financial Group (www.tfgllc.com). TFG is an independent RIA located in northern NJ.