TripAdvisor Earnings Preview: Trends We’re Watching

TripAdvisor (NASDAQ:TRIP), the newly spun-off entity of the leading online travel agency Expedia (NASDAQ:EXPE), is set to release its annual financial results for the first time on February 8. The spin-off is widely perceived as an intelligent move given the different nature of the two businesses as well as it gives TripAdvisor an opportunity to unlock its value fully. TripAdvisor-branded websites globally received more than 50 million unique visitors in July 2011 and have built a marketable base of more than 20 million members and over 50 million reviews and opinions. Riding high on its vast repository of user-generated content and a rapidly expanding audience, TripAdvisor has managed to sustain a phenomenal top-line growth of over 30% over the past several quarters and at least 50% operating margin.

Below we discuss the key trends to watch out for in the upcoming FY 2011 results of TripAdvisor.

We have a Trefis price estimate of $24.83 for TripAdvisor, which is about 30% below the market price.

See our complete analysis for TripAdvisor’s stock

Margins under pressure in the near-term

TripAdvisor’s profit margins are likely to be under pressure in the near term due to a fall in per-click commission fee paid by Expedia, which is TripAdvisor’s most significant advertising customer in terms of revenue. Expedia expects 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. This is likely to reduce Expedia’s marketing spend on TripAdvisor.

Additionally, as a result of the spin-off, TripAdvisor expects general and administrative expenses to increase by approximately $20 million to $25 million. These costs are related to services previously obtained from Expedia, such as accounting, legal, tax, corporate development, real estate, and additional costs associated with being a publicly traded company. The costs will also include Expedia’s obligation to fund a charitable foundation that will be assumed by TripAdvisor. All these costs will likely weigh on its operating margin, going forward.

TripAdvisor poised to capture the vacation rental opportunity through its large user base

In the past year, TripAdvisor forged partnerships with several leading vacation rental websites around the globe, including Interhome, Stayz, Toprural and AKENA Technologies and is set to exceed 200,000 vacation rental property listings. These partnerships expand TripAdvisor’s inventory and add to the premier FlipKey and Holiday Lettings listings presently available on the website. TripAdvisor continues to expand into the holiday home marketplace, following the launch of vacation rentals on TripAdvisor in 2009, and the purchase of a majority stake in the U.S. based vacation rental website, FlipKey.com, in 2008. TripAdvisor announced the acquisition of the U.K.’s largest independent holiday home website, holidaylettings.co.uk, in June 2010.

Though the online vacation rental market is relatively new and unproven, it is rapidly evolving and represents a sizable opportunity for TripAdvisor. According to the November 2011 market sizing study by Radius Global Market Research, vacation rental market grew to $85 billion in 2010 and continues to grow.

By leveraging its existing user base and user generated review community, TripAdvisor can tap the niche opportunity represented by the vacation rental market which typically boasts of big ticket items. According to PhoCusWright, Europe’s €20 billion vacation rental marketplace is experiencing a rapid change with travelers demanding online booking and user generated content.

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