There is exciting growth opportunity ahead for Tripadvisor Inc (NASDAQ:TRIP)
- Online travel advertising spending to reach $13 billion in 2016.
- Meta-search strategy improving conversions.
- TRIP’s soaring mobile numbers is a double-edged sword.
Tripadvisor Inc (NASDAQ:TRIP) stands to benefit from the secular growth trend in online travel advertising space. The company’s management has also in the recent times demonstrated prudent execution style that should further accelerate unlocking of new growth opportunities and drive margins expansion. However, Tripadvisor will have to contend with uncertainty in the global economy, increasing competition and lower mobile monetization.
This Tripadvisor analysis article examines the company’s risks and opportunities to enable you make more informed investment decision. But first, here is a recap of 4Q2015 earnings.
Tripadvisor Inc (NASDAQ:TRIP) posted adjusted EPS of $0.36, topping the consensus estimate of $0.25. Revenue of $309 million for the quarter rose 7% YoY but fell 25.5% sequentially. Unfavorable currency translation terms took a heavy toll on revenue in the quarter. Excluding the impact of forex, TRIP would have posted 12% YoY increase in revenue for the quarter.
Shrinking revenue expected
The management of Tripadvisor warned that revenue growth would be interrupted because of the drag in mobile monetization and lower economics on the ongoing global rollout of Instant Booking initiative.
The chart below shows Tripadvisor’s revenue and cost of revenue for the last five quarters:
What’s exciting about Tripadvisor?
Tripadvisor Inc (NASDAQ:TRIP)’s mobile monetization is still low at just a small fraction of desktop. But there is ample room for the company to expand mobile monetization in the future as it continues to grow its mobile base. Tripadvisor disclosed that the number of average monthly unique visitors on mobile devices increased 60% to 140 million in 2014. Given the growing mobile penetration, Tripadvisor is building an innovative mobile platform to draw in more users and keep those already in actively engagement on the platform.
Tripadvisor typically supplements its internal efforts with acquisitions of strategic assets that help to broaden its scope and user base. In the recent times, the acquisitions have been geared toward mobile expansion and growing global market share. There is plenty of room for growth for Tripadvisor in the international markets as its global penetration is still low.
Secular shift in travel advertising industry
Tripadvisor Inc (NASDAQ:TRIP) stands to benefit from the secular shift of travel advertising to online from offline. It is the same trend playing out in e-commerce and online travel sectors. IDC estimates that the global travel advertising market will grow to $13 billion in 2016 from just about $5 billion in 2013. But more growth is expected in the future because the projected $13 billion online travel advertising spending in 2016 will only be 26% of the total amount spent on travel advertising globally.
The global travel advertising market is worth north of $51 billion, according to IDC estimates.
Tripadvisor shifted its advertising model from click-based to meta-search. In meta-search, visitors to Tripadvisor’s website view all the hotel information they need within the site. In contrast, click-based advertising required visitors to click through to individual sites of hotel advertisers. Click-based advertising approach consumed time. Meta-search not only saves time, but also ensures that Tripadvisor only sends high-quality leads to the sites of advertisers. Think of it that after a visitor obtains the information they need about a particular advertiser, clicking on the link of the advertiser means that they are going there to make reservations and that increases conversion for advertisers.
Instant Booking initiative
Through Instant Booking, Tripadvisor Inc (NASDAQ:TRIP) enables visitors to its website or users of its mobile app to complete the hotel booking process directly within the app or website. As such, Instant Booking improves over meta-search as it eliminates friction in the booking process. The frictionless booking improves experience for users and increase conversion potential for booking partners.
Rapid user expansion
Tripadvisor boasts a large and rapidly expanding base of unique users. Because Tripadvisor’s financial gains are driven mainly by the number of unique visitors that come to its website, improvement in user engagement is a positive sign of future gains. That company is trying to drive that improvement through rollout of innovative products for mobile and Web.
Exciting growth potential
Tripadvisor Inc (NASDAQ:TRIP) has large underpenetrated markets to expand into and that presents an exciting growth potential. There is massive growth potential for Tripadvisor in Latin America and Asia-Pacific regions. Expansion into these markets should further fuel Tripadvisor’s topline growth and perhaps help break its dependency on only a few partners for the bulk of its revenue.
What’s worrying about Tripadvisor?
Tripadvisor is funneling more money to grow its international footprint, expand in mobile and acquire strategic assets. Total operating expenses in 4Q2015 rose to $331 million from $310 in the previous quarter and $228 million a year earlier. While these investments have the potential to pay off over the long-term, disappointments can occur especially with regard to acquisitions that end up being less profitable than expected. Moreover, massive investments have the potential to limit near-term bottom-line improvement.
Lower mobile monetization
Although mobile has been described as the future because of the growing proliferation of smartphone and tablet devices, growing mobile users rapidly presents a challenge for Tripadvisor Inc (NASDAQ:TRIP). You find that mobile monetization remains significantly lower at this point compared to desktop. Part of the reason is that the smaller screen of mobile devices makes navigation and entering information tedious and that adversely impacts conversion. Therefore, it will take time before mobile monetization rises to par desktop.
The other challenge with mobile is that Tripadvisor is compelled to introduce new and innovative mobile solutions frequently to keep up with the demand and competition.
Dangerous revenue concentration
The bulk of Tripadvisor’s revenue comes from a small concentrated number of advertisers. But that heightens the risk of revenue loss and increases pressure on the management to offer favorable terms to advertisers, which can adversely impact financial results. To put that in perspective, 46% of Tripadvisor’s revenue in 2014 came from only two major advertisers.
In the online travel advertising business, Tripadvisor Inc (NASDAQ:TRIP) is facing off against more reputable brands that are also better funded. For example, the company competes for online travel advertising dollars against Yahoo! Inc. (NASDAQ:YHOO), Alphabet Inc (NASDAQ:GOOG)’s Google and Microsoft Corporation (NASDAQ:MSFT)’s Bing. In the climate of fierce competition, Tripadvisor is exposed to pricing wars that eat into its profit margins and make it difficult to attain financial growth targets.
Attaining prosperity won’t come easily and immediately for Tripadvisor Inc (NASDAQ:TRIP). But a closer look at the company’s prospects reveals that it is destined for greatness.
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