I hope you had a nice weekend. Today we have an extended recommendation from Todd Johnson’s DividendLab. As he shows below, this fast-moving stock’s 90% gain year-to-date may just be the beginning for shareholders, thanks to the company’s aggressive growth strategies and leading position in a fast growing industry.
TripAdvisor (TRIP)
from DividendLab
TripAdvisor (TRIP) is the world’s largest travel website with 220 million unique monthly visitors and 70 travel-related user posts per minute. The company’s comprehensive travel-related offerings and high trust quotient have increasingly made it the go-to website for anything that’s travel related. TripAdvisor has consistently grown revenue and profits and delivered excellent investment returns to shareholders.
While online travel is a fairly crowded space, TripAdvisor has clearly emerged as a leader in this space and is garnering more and more traffic as travelers and travel service providers (merchants) increasingly converge on its platform.
Investors have bid up shares on TripAdvisor’s clear breakaway into the top ranks of travel and comparisons to historical valuation measures may no longer apply. That said, the strong run up in shares could prompt profit taking and near-term dips, but with the world going online, TripAdvisor offers a very compelling way to invest in this trend over the long run. Though shares may appear high for now, its $11.57 billion valuation could seem like chump-change in a few years. TripAdvisor does not pay dividends.
Growth through Acquisitions
TripAdvisor is not a one-trick pony but a comprehensive portal. Where the company sees a weakness or misses an innovation, it goes out and makes strategic acquisitions. For example, over the first half of 2013, TripAdvisor completed five acquisitions — covering social media, flash sales, cruises, international vacation rentals and flight/airport information — for a total of $31.6 million in cash.
Growth through Alliances
TripAdvisor is at the forefront of developing mobile device friendly applications. In March 2013, Samsung agreed to pre-load TripAdvisor’s mobile app on all of its Samsung Galaxy S4 smartphones. Samsung is the world’s largest seller of smartphones and this alliance significantly pushes TripAdvisor into mobile customers’ consciousness with prime real estate on the smartphone’s home screen. ...
TripAdvisor understands that its revenue is driven by merchants and works actively on developing transactional tools to increase ease of use and transparency, and on marketing and alliance building to get merchants to see the value of advertising on TripAdvisor’s various websites. TripAdvisor recently introduced an Express Review tool that lets merchants engage with their customers and post reviews on TripAdvisor. The site also offers business listings as a cost-effective way for the company’s 725,000+ hotel/accommodation merchants to target TraipAdvisor’s global audience directly with deals. ...
Vacation Rentals is a fast-growing $85 billion industry and TripAdvisor is well positioned to capitalize on this trend through its portfolio sites such as FlipKey. Traffic on its vacation rental sites is increasing at a 50% pace as the company steps up its efforts to compete against standalone competitors such as HomeAway and AirBnB.
#1 Travel Website On and Off Mobile
The company has fast adapted to changing communication technology and was among the first travel companies to introduce graphic advertising on smartphones in 2012. ... At quarter end 2013, TripAdvisor had about 50 million cumulative smartphone and tablet applications downloaded and 79 million monthly unique mobile device visitors that accessed resources such as free City Guides in 20 different languages. ... Today, TripAdvisor is the definitive resource for travelers and a key partner to merchants who want to serve these global customers.
The site has over 100 million reviews and opinions on over 725,000 accommodations and 1.3 million restaurants and attractions. 75% of TripAdvisor’s traffic originates outside the US. This global scale generates a richer experience for travelers and begets powerful network effects. ... Share price dips should definitely be seen as buying opportunities.
Excellent Shareholder Returns but Shares Could Correct On Profit Taking
Over the past three years, investors have received a 99.2% annualized return on their investment, 4.5 times more than the S&P 500.
Shares have a P/E ratio of 49.3, Price/Sales of 12.6, Price/Book of 12.7 and Price/Cash Flow of 35.9 — well above historical Price/Earnings and Price/Sales trends — and while this valuation reflects strong near-term execution and excellent future prospects as TripAdvisor increases its share of the global travel market, shares could correct near term on profit taking or macro market corrections. ...
Strong Quarterly Financial Performance
For its second quarter ended June 30, 2013, TripAdvisor revenue surged 25% from $197 million to $247 million on a 41% increase in monthly unique hotel shoppers (which led to a 21% increase in revenue from click based advertising) and 18% growth in display based advertising with a 32% increase in impressions. Operating income was up 12% to $94 million and net income jumped 26.3% to $67 million or $0.46 per share from $53 million or $0.37 per share in Q2 2012. ... By region, North America was the biggest contributor to revenue with $133 million (54%), followed by EMEA with 30% and Asia Pacific and China with 12%. Revenues jumped the most, 55%, in Asia Pacific and China on successful expansion in that geography.
Summary
TripAdvisor has done an excellent job of building and acquiring features and functionality that matter most to travelers and merchants. As a result, it is the #1 travel site in the world and is uniquely positioned to grow revenues and earnings. In addition to platform expansion and operational excellence, the company has grown revenues and profits steadily, and rewarded investors well.
While shares are up significantly, comparisons to historical levels do not apply because the company is well on its way to being the dominant online portal as travel spend moves away from traditional channels to online transactions. Investors must also be aware that online visitors are a fickle bunch and could quickly migrate elsewhere if competitors offer something that’s more compelling, either in part or whole. So TripAdvisor’s biggest challenge is staying relevant and growing its global user base. If it succeeds at this, its current valuation will seem like a great bargain ten years from now.
Todd Johnson, Dividend Lab, www.dividendlab.com, 505-514-0036, August 12, 2013