TripAdvisor’s $35 Valuation Threatened By Fake Review Concerns

An increasing number of people have been turning to online travel websites for making a more informed travel decision. TripAdvisor (NASDAQ:TRIP) is one such platform that provides travel related reviews, aggregating around 75 million reviews and opinions about destinations, accommodations, restaurants and other activities. With close to 56 million unique monthly visitors, 32 million members and 22 million mobile application downloads, TripAdvisor’s global community is growing strong.

However, lately, the authenticity of the reviews on TripAdvisor’s website has once again come under scrutiny. TripAdvisor was even investigated by the Advertising Standards Agency (ASA) in September 2011 following growing criticism of its apparent failure to monitor fake comments posted on its website. As a result of the investigation, in February 2012, ASA banned the company from claiming or implying that the reviews on its website were from real travelers.

We estimate TripAdvisor to derive over 91% of its value from its advertising division. A substantial decline in the number of visitors on the company’s website could have an impact on revenues earned through click-based and display-based advertising, thus leading to a decline in its stock value.

See our complete analysis for TripAdvisor’s stock

TripAdvisor’s founder and CEO, Stephen Kayfer, claims that the company has been dealing with the issue of fake review for over 10 years now, and thus has good expertise at catching people who are trying to spam the system. Additionally, according to a survey conducted by the company last year, around 98% of its audience trust the reviews on its website. ^[1]

However, not many users seem to be satisfied with TripAdvisor’s stance on fake reviews and feel that it is not taking any significant steps to curb them. Here, we try to analyze the potential impact of fake review on our current price estimate of $35.18 for TripAdvisor.

Decline In Unique Visitors To TripAdvisor’s Sites

Unique visitors to TripAdvisor sites (per month) has almost doubled, increasing from 32 million in 2008 to about 65 million by the end of 2011. With the company’s growing focus on expanding in social media and extending its presence in the Chinese market, we estimate the number of unique visitors (per month) to grow at a CAGR of 8% till the end of our forecast period.

However, the increasing buzz over the web questioning the accuracy of the content on TripAdvisor sites, can weigh on the growth in its user base. If the number of unique visitors (per month) reaches only 100 million by the end our review period, that will account for a 15% downside to our price estimate.

Rapid Decline In Page Views Per Visitor

If TripAdvisor’s brand image is tarnished by the growing concern over fake reviews, there can also be a possible decline in its page views per visitor per month.

TripAdvisor faces competition in the travel review space from sites such as Yelp and HolidayCheck and from online travel agencies such as Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN), which solicit reviews from travelers who book on their websites. Thus, we forecast a slight decline in page views per visitor by the end of the review period.

However, if the page views decline at a higher pace than we currently estimate, then it could have a bigger effect on TripAdvisor’s stock price. If the page view per visitor decline to 12.3 per month, then we can see a 10% downside to our price estimate.

Social Media Platforms Can Increase Quality Of Online Reviews

Social media platforms show recommendations based on social connections which often have less anonymity, thus offering better quality of reviews. TripAdvisor entered into a partnership with Facebook (NASDAQ:FB) in late 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. Additionally, it recently launched “Local Picks”, a new Facebook application which provides restaurant recommendation from friends and other local residents.

TripAdvisor currently has over 32 million logged-in Facebook users using its application. We feel that the company’s commitment in improving the social travel planning experience can help increase user contribution and improve the quality of  its content on its sites.

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

Understand How a Company’s Products Impact its Stock Price at Trefis

1. TripAdvisor CEO discusses fake reviews, Google, HotelNewsNow.com, November 17, 2011 [↩]