3 Reasons TripAdvisor May Be Overvalued

Submitted by Jeff Michaels as part of our contributors program.

3 Reasons TripAdvisor May Be Overvalued

The world’s largest online travel review company, TripAdvisor (NASDAQ:TRIP), was one of the best performing stocks of 2013, with its share price nearly doubling over the past 12 months, from $44 to $86 per share. The company posted revenues of $944.6 million in fiscal year 2013, up 24% year on year, strong growth that was largely in line with analysts’ expectations.

While TRIP’s top line revenue growth continues to be strong, however, there are growing indications that investor enthusiasm for the company may have driven the company’s stock to unsustainable levels. This article walks through three reasons why, at its current pricing, TRIP may be a risky investment.

Traffic Declining in the Company’s Core US Market

source: ComScore, January, 2014

North America is TRIP’s largest market. In 2013 the company generated $493.5 million in revenue in North America, representing roughly 52% of the company’s total revenues. However, traffic to the company’s US website appears to be on the decline. According to traffic measurement service, ComScore, TripAdvisor’s US traffic dropped a dramatic 18% between January, 2013 and January of 2014 — its first annual decline in the company’s history. Back in August, the stock fell 9% after CEO Steven Kaufer mentioned that the summer had been “bumpy” and that traffic to the company’s website had been “not as strong” as expected, but the stock later recovered. However Mr. Kaufer’s comments appear to have been aimed at letting some air out of the bubble and lowering the street’s expectations about the company’s ability to sustain its growth trajectory. Notably, this large decline in unique visitors came despite a 40% increase in marketing expense to fuel a highly publicized marketing campaign. Could this decline, despite a big surge in marketing, signal the company is in trouble its home market? During TRIP’s last earnings call, analysts like Nomura’s Anthony Diclemente noted the company had a clear deceleration in hotel shopper growth, a warning sign for a company where hotel shoppers are its bread and butter.

Erosion in EBITA Margins Accelerating

source: TripAdvisor

While revenue is growing, TRIP’s EBITDA margins have been steadily eroding for four consecutive years, from a high of 56% in 2009 to 40% in 2013, and the pace seems to be accelerating. In Q4 or 2013, TRIP’s EBITDA margins fell to a record low of 25%, down a whopping 35% versus the company’s EBITDA Margin in Q4 2012. While the company’s management attributed this decline largely to a one-off television advertising campaign, we believe that TRIP has been steadily increasing its cost structure, particularly marketing expense, to try to spend its way to growth in an increasingly challenging market environment. Kaufer himself said, “As it relates to our efforts in search engine marketing, social, and TV, to name three big ones for us over the past few years, we are willing to invest up to 0 incremental profit margin in order to expand our reach.” Given this dynamic, it is likely that the company will continue to face margin erosion as it battles to retain share in the US and garner share overseas. While many investors have preferred TRIP as an investment relative to its thinner-margined OTA counterparts, TRIP’s Q4 profits were nearly identical to those of Priceline (NASDAQ:PCLN), and seem to be heading in the wrong direction.

Competition Heating Up

While TripAdvisor remains the largest online travel review provider, competition for user attention has only intensified. On one end, both Expedia and Priceline’s Booking.com brands have made an aggressive push into the reviews space, closing the gap with TRIP while arguing that their “verified customer reviews” are more trustworthy and less open to manipulation that TripAdvisor’s anonymous review system. Other Internet giants, like Google (NASDAQ:GOOG), have been signaling their intent to try to muscle in on TripAdvisor’s business, offering their own reviews and meta-search product. An aggressive move by Google could be devastating to TripAdvisor, given the company’s reliance on organic search as a source of traffic, and TRIP’s investment in marketing may indeed be a hedge against Google. Even Yahoo, whose travel property has been badly neglected, still has a reach of 10MM unique users per month in the US, and CEO Marissa Meyer could change the game and put additional pressure on TRIP should she decide to turn her attention to the highly lucrative travel vertical.

On the other end of the spectrum, TripAdvisor is beginning to face competition from a crop of new entrants. One San Francisco company, Gogobot, has begun attracting attention by allowing users to filter hotels based on personality, not just ratings, and recently unveiled its own meta-search product for hotels. While TRIP hit headwinds on traffic in 2013, ComScore reports that Gogobot’s US traffic more than tripled over the same time period. AirBnB, another fast-growing company out of San Francisco, is putting a different kind of pressure on TripAdvisor by offering users an alternative to hotels — allowing them to rent extra space in the homes of locals and skip the hotel booking process altogether. The company has raised more than $326 million in funding, and has attracted a growing following of travelers for which hotel reviews are no longer a necessary ingredient in the trip planning process. Taken together, the competition from players both old and new means greater challenges for TRIP in the year ahead, and likely a continued reliance on heavy marketing spend to try to maintain market share.

Conclusion

TripAdvisor had a flagship year in 2013, with the stock more than doubling and now sitting at record highs. However the stock currently trades at a P/E multiple of 61 ? nearly double that of Google (GOOG ? 29), Priceline (PCLN -33), some of the best performing technology stocks. Given the steep decline in its US user base, its steady erosion in EBITDA margins, and the increasing competition in the travel review market, we believe the company’s stock may be overvalued at current pricing levels.