Trends Driving TripAdvisor’s $35 Valuation

TripAdvisor (NASDAQ:TRIP), the newly spun-off entity of the leading online travel agency Expedia (NASDAQ:EXPE), has witnessed an upswing in its stock price ever since it was listed in December last year. We feel the spin-off was a good move as it gives TripAdvisor an opportunity to unlock its value fully, given the different nature of the two businesses. Apart from trends in consumer spending on discretionary items, which is highly influenced by the state of the economy, there are various other factors that can considerably impact TripAdvisor’s valuation. Here, we provide some thoughts on the key trends that will impact the company’s profitability and future growth prospects.

See our complete analysis for TripAdvisor’s stock

Increasing Online Penetration

Given the increasing worldwide online penetration, the internet has become an integral part of the overall travel planning process as it enables travelers to refine searches, compare destinations and view real-time pricing. According to PhoCusWright’s Global Online Travel Overview (April 2011), the global online leisure and unmanaged business travel segment is expected to grow twice as fast as the total global travel market, with gross booking in the online segment expected to surpass $300 billion globally in 2012. The report further estimates that travelers will book one-third of the world’s travel sales online by the end of 2012.

The flagship TripAdvisor brand operates websites in 30 countries in 21 languages. Its core TripAdvisor platform and many of its other brands are uniquely positioned to appeal to travelers globally and strive to provide universally relevant content and community. With internet penetration currently estimated at 32.7% globally (78.6% in North America, 61.3% in Europe, 39.5% in Latin America and 26.2% in Asia), we believe that TripAdvisor has the potential to grow in all markets.

The company has a marketable base of more than 20 million members and over 50 million reviews and opinions, putting it in a good position to leverage the exponential growth in online travel.

Increase in Online Advertising Spend

With growing economic stability, the global travel market is bound to witness an increase in the years ahead. We therefore believe that travel providers and travel related advertisers will continue to devote significant resources to advertise their travel products and services. With the projected growth in the online advertising market, an increasing amount of travel advertising spending is expected to migrate from traditional offline advertising channels to online advertising opportunities.

The global online advertising market is growing and is projected to exceed $100 billion by 2014. For travel specifically, International Data Corporation estimates that the annual expenditures for global online travel advertising, which was over $5 billion in 2011, will  grow at a compound annual rate of 15% through 2014.

We estimate click and display advertising to contribute over 91% to TripAdvisor’s valuation. However, the company derives over 90% of its revenue from a relatively small number of significant advertisers, with Expedia accounting for over 30% of the total revenue. Expedia is expected to reduce the percentage of gross profit (on bookings generated from TripAdvisor-sourced visitors) that it pays to TripAdvisor in the future for click-based advertising, which could have a significant impact on TripAdvisor’s annual revenue from the company.

Growth in Social Media

Consumers are increasingly using online social media, such as Facebook (NASDAQ:FB), as a means to communicate and exchange information, including travel information and opinions. According to PhoCusWright, Facebook users who are referred to travel booking sites are more likely to book travel than those referred via search engines such as Google (NASDAQ:GOOG).

TripAdvisor entered into a partnership with Facebook (NASDAQ:FB) in December 2010, and launched a setup that allowed users to receive “Instant Personalization” when visiting the site with an active Facebook account. Using the system, TripAdvisor users can check out their friends’ travel experiences before planning their own trip. TripAdvisor took the partnership a step further by launching “Local Picks” last quarter, a Facebook application which provides restaurant recommendation from locals and friends. (Read: TripAdvisor.Com Launches Local Picks, A Facebook Apps For Social Recommendations)

Growing Mobile Travel Spend

With the exponential growth in mobile devices, an increasing number of people are using mobile and tablets to access the internet. Smartphone adoption around the world is skyrocketing and is fundamentally changing the way people get travel advice. According to IDC, mobile travel spend is expected to cross the $2 billion mark by 2014, registering a y-o-y growth rate of above 40%. Additionally, the mobile ad spending in the U.S. is expected to grow from $1.5 billion in 2011 to close to $10.8 billion by 2016.

To address the growing demand from this segment, TripAdvisor has developed mobile and tablet applications to allow greater access to the company’s travel information and resources. It announced the launch of its mobile website in March 2010 and has since added apps for the iPhone, Android, Nokia, Palm smartphones, as well as the iPad.

TripAdvisor’s page views on mobile and tablet devices were up 2.5 to 3 times last quarter. We have a positive outlook on the company’s growth opportunities in mobile space as it continues to invest heavily in its mobile platforms such as SeatGuru mobile and tablet applications.

Our price estimate of $35.18 for TripAdvisor is almost in line with the current market price.

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