TripAdvisor Spin-off From Expedia Unlocks Value, Despite Lower Margins

The travel reviews aggregator TripAdvisor (NASDAQ:TRIP) has posted phenomenal top-line growth of over 30% sustained over the past several quarters and at least a 50% operating margin. The spin-off from Expedia (NASDAQ:EXPE) is being widely perceived as an intelligent move given the different nature of the two businesses as well as giving TripAdvisor an opportunity to unlock value. The stock currently commands an over $3 billion in equity value. Moreover, TripAdvisor’s strong revenue growth has until now been overshadowed by Expedia’s relatively sluggish performance. These benefits withstanding, we see TripAdvisor facing some concerns which have the potential to impact its operating margins, at least in the medium term. Apart from the costs of operating as an independent company, we expect TripAdvisor to witness some contraction in margins due to reduced advertising revenues from Expedia.

Expedia has accounted for over 30% of  TripAdvisor revenues in the last few years. We take a closer look at the implications for TripAdvisor’s bottom-line below.

We have a Trefis price estimate of $24.83 for TripAdvisor, which is in line with the market price.

See our complete analysis for TripAdvisor’s stock

Reduced marketing spend from Expedia to pressure margins in the near term

TripAdvisor’s profit margins are likely to be under pressure in the near-term due to a fall in the per-click commission fee paid by Expedia. Expedia is TripAdvisor’s most significant advertising customer in terms of revenue and Expedia currently 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, which is expected to have the effect of reducing its marketing spend with TripAdvisor.

However, with a healthy outlook for user growth at TripAdvisor and the ability of the site to monetize over a long-term, we expect the margins to revert to historical levels of ~55% by the end of Trefis forecast period.

Higher general & administrative spend following the spin-off from Expedia

As a result of the spin-off, TripAdvisor expects general and administrative expenses to increase by approximately $20 million to $25 million for costs to be incurred related to services previously obtained from Expedia, such as accounting, legal, tax, corporate development, real estate, additional costs associated with being a publicly traded company, as well as costs related to Expedia’s obligation to fund a charitable foundation that will be assumed by TripAdvisor in connection with the spin-off. This is likely to weigh on the operating margins going forward.

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