A Scenario That Could Significantly Dampen TripAdvisor’s Price Estimate

TripAdvisor (NASDAQ:TRIP) ended 2014 on a healthy note, riding on acquisitions, service upgrades, and its newly introduced Instant Booking Platform. The world’s largest travel review company posted revenues to the tune of $1.3 billion in 2014, up by 32% year on year. All of the three divisions posted strong top line growth — click-based advertising revenue grew by 25% year on year to $870 million, display-based advertising increased by 18% year on year to $140 million, and subscription & transaction revenue was up by 82% year on year to $236 million. ^[1]

However, The Instant Booking platform, one of the expected growth drivers, can provide roadblocks on TripAdvisor’s growth path. In this article, we explore how Instant Booking can limit TripAdvisor’s growth and the possible ramifications.

Our price estimate of $87 for TripAdvisor’s stock is around a 15% premium to the current market price.

See Our Complete Analysis for TripAdvisor Here

TripAdvisor’s Advertising Revenues May Be Dampened Due To Instant Booking (~15% Downside)

• Background: TripAdvisor’s Meta-Search Combined With Instant Booking Provide End-To-End Travel Services To Its Users

In mid-2013, TripAdvisor launched its meta-search feature that integrated users’ search query results on the main page, allowing users to search and compare various options on TripAdvisor. This enhancement allowed users to see hotel pricing options and availability from booking partners on a single page. Until then, users had to visit the advertisers’ sites to get such information. TripAdvisor claimed that its ad conversion rates and ROI for advertisers improved significantly post the introduction of this feature. This, in turn, facilitated the company to charge better prices for ads or clicks.

In Q1 2014, TripAdvisor rolled out its Instant Booking feature which aimed at reducing the friction related to mobile bookings. Instant Booking allowed users to book hotels on the TripAdvisor platform itself with the “Book with TripAdvisor” option, as against visiting the hotel or Online Travel Agency (OTA) website to complete the booking process, after searching for hotels through TripAdvisor (which is TripAdvisor’s current model).

The Instant Booking feature, which is presently available in beta format in the U.S., allows TripAdvisor’s partners, such as: hotel chains, independent hotels, bed and breakfasts, and OTAs, to vie for top spots (through an auction bidding tool) ^[2] on TripAdvisor’s metasearch results.

The Instant Booking feature, coupled with meta-search, provides users with end-to-end services starting from listings to the comparison of availability and pricing, to completing their bookings.

TripAdvisor’s standard meta-search model follows a cost-per-click (CPC) structure where partner hotels bid for each click made by users on the partners’ links. Instant Booking, on the other hand, requires partners to pay a commission for each completed transaction. Hence, willing partners bid via an auction, for the commission percentage they are ready to pay for completed transactions. The commission based model is similar to most of the OTAs’ pricing process of a fee per transaction, charged after the completion of  a stay. ((What TripAdvisor’s instant booking means for hotels, tnooz, November 2014))

Advantages Of The Instant Booking Model

• Smaller hotels/chains couldn’t compete with established OTAs to post advertisements on TripAdvisor, under the cost per click model. These entities could be willing to participate in the commission based model, as their payment to TripAdvisor is based on actual hotel stays as against the smaller hotels paying TripAdvisor for a mere click by the user on the hotel’s website.
• Additionally, TripAdvisor’s auction model is more affordable for the smaller chains and independent properties. Hence, we expect TripAdvisor to gain more partners from different segments due to this pricing advantage.
• This new model will expand TripAdvisor’s functionalities beyond a travel review website, as TripAdvisor starts offering services like other established OTAs.

In the long run, Instant Booking might help TripAdvisor to provide direct competition to established names such as Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE).

How Could The Instant Booking Model Thwart TripAdvisor’s Advertising Revenue Growth?

• Increasing Marketing Spends

This is a unique model in the existing marketplace and hence gaining partners on the platform is taking longer than usual according to management. The company aims to spread the new avatar of TripAdvisor through online and offline channels, through their “plan, compare, and book” message. In 2015, the company plans to spend around $60 million towards TV advertisements, in order to spread the message across the globe. ^[3]

• TripAdvisor’s Dependence On OTA Leaders, Priceline And Expedia 

The Instant Booking platform is acting as a double-edged sword for TripAdvisor. On the one hand, its functionality gets expanded, on the other hand, the feature puts it in direct competition, with two of its biggest customers in advertising display, i.e., Priceline and Expedia. For December 31, 2014, both these companies individually accounted for over 10% of TripAdvisor’s total revenues, and the two companies combined accounted for 46% of its total revenues. ^[4]

• The OTA Leaders Refused Being Featured On Instant Booking

Both the OTA giants have chosen not to display their inventories on the Instant Booking platform. instead, they have chosen to display their inventories on applications that are Instant Booking’s direct competitors. And not without valid reasons. The launch of Instant Booking undermines the functionalities of Priceline and Expedia. With Instant Booking, all the steps of the booking process get completed on TripAdvisor’s website. However, Instant Booking’s success is largely dependent on the inclusion of inventories from the two online travel behemoths. ^[5]

Additionally, for OTAs, Instant Booking might be less valuable than TripAdvisor’s meta-search option because these companies want to attract customers to their own websites, in order to eventually convert users to direct bookers from their own websites. This would generate direct business from their brands in the future. The “Book with TripAdvisor” facility erodes the brand recall of the OTAs for users, as they can already book through the TripAdvisor website. Also, TripAdvisor turning into an OTA and providing direct competition to its biggest customers, might not fare well with the OTAs. ^[6]

In view of TripAdvisor’s Instant Booking platform’s success, we have forecasted its advertisement page revenue per thousand impressions (RPM) to increase from $63 in 2014 to almost $67 by the end of our forecast period. However, given the lack of demand from its two biggest customers, Priceline and Expedia, if the RPM declines to $55 by the end of our review period, then TripAdvisor’s price estimate would be decreased by almost 15%.

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1. 4Q14 Supplemental Financial Information, TripAdvisor Investor Relations, February 2015 [↩]
2. TripAdvisor raising the game for Business Listing with rates, availability, and booking service, tnooz, July 2013 [↩]
3. TripAdvisor (TRIP) Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 11, 2015 [↩]
4. TripAdvisor’s 10-K Filing for year ended December 31, 2014 [↩]
5. Priceline & Expedia Could Undermine TripAdvisor Instant Bookings, Amigo Bulls, December 8, 2014 [↩]
6. What TripAdvisor’s instant booking means for hotels, tnooz, November 2014 [↩]