Can Tripadvisor Sustain The Newly Found Stock Momentum?

Tripadvisor’s stock (NASDAQ: TRIP) has rallied a solid 38% from sub $14 levels off March bottom to around $20 currently (as of June 11th). This modestly outperformed the broader markets, which grew 34% over the same period. The travel search site gained big on the expectations of improving sentiment of travel over the reopening of the economy. Tripadvisor’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. However, the stock was still down 60% from levels seen since the end of 2018. While the company has seen steady earnings growth over recent years, its P/E multiple has declined considerably. We believe the stock is unlikely to see any significant upside from the current levels, given the potential impact of a Covid-19 led recession on the company’s already struggling core-hotel business. Our dashboard, ‘What Factors Drove -60% Change In Tripadvisor’s Stock Between 2018 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Tripadvisor’s stock price declined 39% from $49.60 at the end of fiscal 2018 to $30.38 at the end of fiscal 2019. A major factor in the drop in the company’s stock price was due to the markets re-valuing the company at a lower P/E multiple. The company’s P/E multiple declined from 60 in 2018 to 33 in 2019. It should be noted that the P/E is down to about 22x now, given the volatility of the current situation.  Over the same period the company saw a 3% decline in Tripadvisor’s revenues. However, the company’s net income margin increased from 7% in 2018 to 8.1% in 2019, which helped earnings per share grow from 82 cents in 2018 to 91 cents in 2019.

So How Has Coronavirus Impacted The Stock?

Tripadvisor stock has suffered as states and countries are on lockdown. The travel industry has been the worst hit during the coronavirus pandemic. For Tripadvisor, a company that was already struggling with declining core hotel revenues, the coronavirus outbreak is yet another headwind. The company’s Hotel revenues (which account for more than half of its sales) have been on a declining trend in the last few years, specifically having lost more than $100 million in revenues since 2015. The primary reason for this decline was lower click-based advertising revenues on Tripadvisor-branded websites. The company is also facing aggressive competition from Google as it is pushing its own hotel products in search results. Tripadvisor’s non-Hotel segment (Experiences and Dining) has been driving the growth in the company’s revenues for the past few years.

In the recent Q1, Tripadvisor’s revenue fell 26% year-over-year, led by a 33% decline in Hotels, Media & Platform revenue, partially offset by 4% growth in the Experiences segment. In addition, total EBITDA fell 55% during the quarter. The company finished the quarter with $798 million in cash, which included drawing down $700 million from a credit facility. The company also reported GAAP EPS of -$0.12 and non-GAAP EPS of $0.07. Going forward, the company expects Q2 to be worse than Q1 with “little to no revenue, and significantly negative EBITDA.” However, the company expects some revenue improvement from Q3 2020 onward. With roughly half of its expenses coming from sales and marketing, Tripadvisor has high variable costs, making it easier for the company to conserve cash and survive the crisis. The next few months will certainly be difficult for Tripadvisor as the travel industry won’t recover until a Covid-19 vaccine is administered at scale.

If there isn’t clear evidence of containment of the virus at the time of the Q2 earnings announcement, we believe the stock will see a P/E decline from the current level, which combined with a reduction in revenues and margins could result in the stock price shrinking further to $15 levels.

Also see- Expedia Downside: How Low Can Expedia Stock Go?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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