Description

TripAdvisor is in the early stages of a business transformation from a company still heavily reliant (though increasingly less so) on B2B metasearch revenue to one whose revenue composition is substantially consumer subscription based.

If successful, TRIP is likely to substantially exceed peak 2018 revenue levels of $1.6 billion and meaningful exceed 2019 peak EBITDA and peak EBITDA margins of $438 million and 28%, respectively.  Simply assuming a cyclical recovery in the business to 2019 revenue levels of $1.56 billion (aided by modest contributions from the subscription offering ) and reflecting only $150 million of the $200 million of targeted fixed costs that have already been taken out of the business suggests that EBITDA can reach $585-$590 million in the next couple of years.  Based on TRIP’s enterprise value of $6.3 billion, the stock is currently trading at less than 11x recovery EBITDA and perhaps 15x free cash flow (even after the significant spike in share price today), which seems attractive, relative to the potential for a material re-rating from a successful business transformation.  We believe the stock can trade to $60-$65 in 12 to 18 months assuming a 14x-15x target EBITDA multiple, as TRIP increasingly demonstrates progress on the transition of its business to a consumer subscription offering.

In addition to owning TRIP, we own shares of LTRPA as a higher risk / higher reward way of participating in the upside appreciation of TRIP stock price.  At current prices, we estimate that investors can create LTRPA, based on our estimate, at roughly $36 per TRIP share, with added kicker of a potential change of control premium in the event of an M&A event.    

TripAdvisor’s reinvention is, in part, being driven by highly respected travel industry titan Greg O’Hara.  The transformation involves TripAdvisor returning to the direct booking / instant book-like model with a substantially better value proposition to the consumer.  In return for a $99 annual subscription to Tripadvisor Plus, consumers will receive a 10% (sometimes more) discount on hotel accommodations, discounts on experiences, and various amenities (free breakfast, late checkout, early check-in, etc.) 

TRIP will seek to make ZERO margin on its bookings, unlike an OTA.  Instead, consumers will capture the margin that would normally flow through to an OTA provider like Booking.com or Expedia.  This positions TRIP to potentially become the low-cost provider of hotel accommodations to the consumer.

Think of this subscription offering as being akin to the benefits associating with being a member of the American Express fine hotel and resorts program associated with American Express Platinum membership.  

Management believes it has the potential for tens of millions of subscriptions and sees potential for multiple billions of dollars in subscription revenue at this price point.  

Many historical pivots without success

TripAdvisor’s goals seem quite lofty in the context of its failed instant book initiative from 2014, the failure to integrate and execute on its flipkey (industry leader at the time) vacations rentals acquisition in 2009, and the increasing competitive inroads that Google is making into online travel through its own travel product offerings.

As such, TRIP’s business transition will not be easy.  The challenges for TRIP are many:

1. Aggregation of enough inventory to make the offering robust for consumers on the site.  

2. Consumers do not typically go to TripAdvisor to transact.  The failed experiment with instant book offers a reminder that this will not be easy.

3. Metasearch is arguably in secular decline

4. Management has historically been weak.  While Greg Maffei is a genius and exceptionally strategic guy, under his stewardship, TRIP has been less than successful.  One could argue that relative to its potential, TRIP has been one of the worst of the Liberty Media investments.  CEO Kaufer has been in his role for over 20 years.  We are hopeful that changes are forthcoming.  

Reasons why TRIP could be successful with the transition to subscription

1)  Greg O’Hara (bio) – As of today’s close, Greg O’Hara and his firm Certares have $750 million reasons to care about TRIP share price.  O’Hara joined TRIP’s board of directors and became Vice Chairman upon Certares investing $325 million in LTRPA to replace a margin loan gone bad in the depths of the COVID crisis.  The 8% preferred has extraordinary favorable characteristics to Certares, accreting at the rate of 80% of TRIP’s share price, with a starting reference price of $17 per TRIP share.  At TRIP’s current share price, we estimate the preferred to be worth roughly $750 million.

Certares is a giant in the travel industry, and Greg O’Hara is a highly regarded industry executive.  In addition to the LTRPA preferred, the company’s investment portfolio includes the follow investments, among others:

• American Express Global Business Travel – a 50/50 JV with AMEX

• Internova Travel Group – a leading premium corporate, leisure, franchise and consortia travel company, including the following units: Global Travel Collection, Travel Leaders Group, Altour and Bonotel Exclusive Travel.

• LATAM Airlines – the leading airline group in Latin America

• Azul S.A - the largest airline in Brazil by number of flight departures and cities served.

• Marietton Developpement – the largest independent, traditional travel company in France and a major tour operator

With O’Hara’s extensive experience operating the travel agency business and his deep relationships inside JP Morgan Chase, we see potential for some interesting partnerships to evolve.  Moreover, we believe that material changes to capital allocation and strategic direction are likely.  We would also not be surprised to see some changes to the senior leadership over time. 

2) Huge base of 400+ million unique monthly visitors (pre pandemic) - TripAdvisor’s user base grew over 100 million from 2015 to 2018, with 2019 the first decline in visitors (reflecting the impact of Google prioritizing its vertical search results over OTAs/Metasearch providers.)  Even with the impact of Google, 2019 traffic still stood at a robust 421 million visitors.  If TRIP is successful in only getting 5 to 10 million users to convert to TripAdvisor Plus, we are talking about $500 million to $1 billion of revenue.  Management believes much higher levels are attainable.    

3) eDreams Odigeo is a model – eDreams Odigeo launched a consumer subscription offering roughly three years ago and currently has 664,000 members paying roughly $50 to $65 per year.  eDreams forecasts 2 million subscribers by 2023.  Based on the vast difference in size between traffic of eDreams and TripAdvisor, it is not that difficult to imagine TripAdvisor having 5 to 10 million subscribers (out of a pre-covid monthly unique user base of 400+ million) within a couple of years. 

Source: eDreams presentation.

eDreams vs. TripAdvisor Traffic Rank

Source: Similar Web

4) Potential for partnerships with credit card companies – To the best of our knowledge, neither Chase nor Bank of America offer a broad travel planning benefits like that available from American Express.  If either entity decided to include TripAdvisor Plus in its premium or base card offering, the impact on TRIP could be quite substantial.  Each 1 million Plus members contributes roughly $100 million of revenue at what should be software-like gross margins.  A relationship with either company could potentially generate hundreds of millions of dollars in profit contribution to the company, even at a materially discounted wholesale rate.

Outlook 

Business model transitions are not easy and TRIP management has not a great track record executing them.  We believe the X factor here is the presence of Greg O’Hara and Certares.  They are thinking about the under-monetized base of TripAdvisor customers very differently than management has in the past.  We can envision a scenario where TRIP becomes almost entirely a consumer subscription offering and experiences and dining are thrown in at cost, passing those margins on to the consumer, fattening the value provided to the hotel/travel customer and turning TripAdvisor into the low cost provider of online travel services.

Of course, there will be cannibalization of the metasearch business if TRIP is successful with this transition.  That would be a great trade-off for the company. 

Here some quotes from the fourth quarter shareholder letter:

“Today, Plus subscribers can access deals and perks across more than 100,000 hotels as 

well as exclusive savings on our hundreds of thousands of bookable experiences. Like these other 

consumer subscriptions, over time we envision adding many more services and benefits such as more 

VIP amenities, in‐destination travel benefits, airline related perks, people‐powered travel support, 

member‐only content, and exclusive availability to experiences and reservations at the world’s most 

iconic destinations and restaurants.”

Taking a methodical approach. “In beta, Plus remains limited in both scope and geographic reach by 

design. We expect to continue our U.S. rollout during the first half of 2021, with other English‐speaking 

markets later. We are promoting Plus primarily on our owned channels and particularly in “no brainer” 

moments such as hotel searches for $750 or more, instances when the hotel discount generates savings 

for the consumer in excess of the $99 subscription fee. Looking ahead, we see the potential to drive 

consumer adoption via partnerships and other marketing channels. We believe our deliberate, 

methodical approach is appropriate. Building strong subscription businesses take time, and we have 

measured expectations for 2021 in acknowledgment of the challenges inherent in launching any new 

product during a pandemic, much less in travel.”

 Significant opportunity ahead. “That said, we are excited and confident that Plus’s strong consumer 

proposition ‐ built on exclusive savings, perks and benefits that will make a trip more memorable ‐ will 

resonate globally and our large audience and influence uniquely positions us to capitalize on this 

opportunity. In 2019, we generated over 160 million hotel metasearch clicks from hotel searches for 

stays of $750 or more. Converting even a small percentage of engaged Tripadvisor traffic, not to 

mention the hundreds of millions of visitors per month that are searching on Tripadvisor for hotels and 

experiences to book, implies a long‐term growth opportunity to achieve tens of millions of subscribers 

and a multi‐billion dollar recurring revenue.”  

Appendix:

Acquisition History: Many acquisitions, Some Successes, Some Failures

Source: Bernstein

TripAdvisor: Categories and Brands

Source: Bernstein

TripAdvisor: Revenue Composition 

Source: Bernstein Estimates

TripAdvisor: Margin by Segment

TripAdvisor: Revenue reporting categories and type of revenue model

Source: Bernstein

Source: Skift, SimilarWeb

eDreams: 2019 Italy Case Study 

Catalyst

Progress on Plus Membership Growth as year unfolds

Economic Recovery

Management Change

Partnership Annoucements