Description

We think there is substantial investor fatigue around TripAdvisor, and that has likely created an opportunity for a long-term (3-5 year horizon) entry price. There is a very detailed pitch from Macrae538 already on VIC, and we urge members to view that pitch for additional background, as we’ll try not to overlap.

Overview:

We’ve had difficulty finding compelling investments recently, as the market has relentlessly grinded higher over past couple years. What we’ve typically been seeing in this environment is very elevated stock prices along with lofty expectations built into those high multiples. So, we’ve found what we believe is a fairly compelling opportunity with very low expectations: TripAdvisor. The recent lack of execution and strategic missteps have hurt the stock considerably, along with the heightened competitive intensity in TRIP’s meta-search business. Expectations are now so low for TRIP’s meta-search hotel business, that with reasonable growth assumptions for the non-hotel business, one is essentially getting the hotel business for “free”.  While many have written the stock off as a failed growth story, we feel a decent return can be had with only modest success in TRIP’s other business segments. Additionally, there are a few call options (attractions & restaurants) that have the potential to be “home-runs”. We also think there is a possibility that the competitive intensity will eventually subside in meta-search and/or potentially large hotel chains will put more emphasis on directly listing inventory away from Priceline and Expedia and utilizing TripAdvisor’s channel.

What has created the opportunity?

2016 was the year of hope for Instant Book, and 2017 was the year of reality; TRIP management ended up pulling back its focus on Instant Book after strategic miscalculations led to poor adoption/ROI.  For those unaware of Instant Book, it was a strategy for TripAdvisor to take more of the leakage from the meta-search referral process that sent traffic to the big OTAs (Priceline & Expedia) who captured the lion’s share of the profit. So there were very high hopes that Instant Book could narrow that leakage; however, management underestimated how difficult it is to change consumer behavior overnight. There has been a fairly low consumer adoption rate of actual bookings through TRIP’s Instant Booking strategy; on top of this, the actual margins on Instant Book are lower than meta-search, in order to incentivize OTAs to share inventory.

Furthermore, Priceline recently stated it would de-emphasize meta-search in its last quarter. So TRIP is dealing with mobile monetization headwinds, OTAs that will likely pay less for meta-search, and a large questionable TV advertising campaign. If we haven’t talked you out of investing in TripAdvisor by now, please continue reading.

So what are we getting for $35 bucks ($4.27bn EV)?

·         The largest travel community in the world, 455mn average monthly unique visitors (Q3 ’17) growing at a 16% CAGR.

·         A low capital intensity business that is continuing to scale, especially with regards to the non-hotel segment.

·         4.5% FCF yield on what should be a growth business with long-term tailwinds.

·         570mn reviews and 115mn user generated archived photos.

·         A business trading at all-time lows on EV/sales (2.55x LTM) vs. a peak in the mid-teens.

·         A so-so hotel meta-search business that is masking an excellent non-hotel business growing organically ~26% y/y.

·         This non-hotel business has been under earning for years, as heavy investment has gone into the platform growing bookable properties and streamlining the integration of FlipKey, Viator, and La Fourchette (The Fork).

·         While the non-hotel segment is only ~ 29% of revenue (as of last Q), it represents 46% of consolidated adj. EBITDA mix as of last Q, and will continue to grow as a percentage of overall EBITDA.

With the number one travel app and 455mn average monthly unique visitors coming to its site, TripAdvisor influences hundreds of billions of dollars of travel spending.  TRIP has made significant changes from what used to be a meta-search pop-up site-- where a user would click on a hotel for a particular date and he/she would get 5-10 pop-ups (clicks).  That atrocious user experience has now been redefined to route more traffic internally, which is bookable (attractions, vacation rentals, & hotels) directly on TripAdvisor, rather than sending everything off to Priceline or Expedia. These initiatives have been a painful transition, especially within the hotel segment which has suffered from a multitude of factors. The big disconnect is that TripAdvisor clearly has not perfected the art of converting traffic into dollars, but the site has transformed from a crude referral site to a more refined book and review site.

While the below table is not an indicative valuation metric, we think it does give investors a glimpse of sentiment and expectations based on value per monthly active user.

Source: Bloomberg & Company presentations

The Non-Hotel Business

We believe TripAdvisor is well positioned to take advantage of the rapid shift occurring in the attractions business, which is the largest segment of the non-hotel category. Non-hotel should do around $520mn in sales in 2019, as the business scales up and increases fixed cost leverage we think it could do 35%+ operating margins. We think the non-hotel business has the potential to eclipse the hotel business Adj. EBITDA by 2020 and should likely start driving the growth metrics as it becomes a bigger piece of the pie, with much higher organic growth than the hotel segment. The non-hotel business ($347mn LTM) is comprised of attractions, restaurants, and vacation rentals. The two high growth segments are attractions (the largest) and restaurants, which both have just started to inflect from cost centers into cash generative operations. From our understanding, the vacation rental business is growing and is profitable, but is likely the smallest component within the non-hotel segment.

With the attention recently on the underperforming core hotel business, we think investor focus is beginning to now pivot towards non-hotel. While the hotel segment currently generates over 70% of revenues, the majority of MAUs are not hotel shoppers, but non-hotel shoppers. For instance, last quarter alone,  almost 65% of unique visitors (292mn MAUs) on TripAdvisor were searching for something other than a hotel ( ie. Restaurant, attraction, or vacation rental). If you take it a step further and break down the growth rate on non-hotel traffic versus hotel traffic, one can see that on average over the past 11 quarters,  y/y growth on non-hotel unique visitors has outpaced unique hotel shoppers by 2.4x. And in the last quarter alone, non-hotel unique visitors grew over 3x as fast as the hotel segment. In early 2014, aggregate unique hotel shoppers and unique non-hotel shoppers were roughly at par; during the past four years, non-hotel growth has significantly outpaced hotel growth and now should be two-fold hotel shoppers in the next few quarters.

Source: TripAdvisor Supplemental Investor Info

Looking at the below scenario analysis, we think it is highly plausible that the non-hotel segment experiences significant growth, our base case assumption we feel is fairly conservative at roughly 600 basis points below recent organic growth-- this does not take into consideration any bolt-on acquisitions. The two most relevant comps that come to mind once you segment TripAdvisor’s non-hotel and hotel business are Yelp and Trivago, respectively. Yelp for instance is trading at 20x EV/Adj. EBITDA FY ‘17, and 16x FY ‘18, with top line growth in the low teens. So to us it seems quite reasonable TRIP’s non-hotel business could trade for 16x while growing top line greater than 20% per year. On top of this, YELP’s MAUs have been growing a modest 3.2% on average over the last 6 quarters, versus TRIP’s non-hotel MAU growth of ~ 16%.

Source: Bloomberg and Consensus estimates
* Assumes ~20% revenue growth (base case) in non-hotel

**Assumes 35% Adj. EBITDA margins

***Assumes a further 20% decline in aggregate Adj. EBITDA in hotel

Looking at Trivago versus TRIP’s metasearch/hotel business the decoupling becomes even more evident. Trivago currently trades at an EV/Sales of ~ 2.3x, where the implied multiple for TRIP’s hotel business in our base case is 0.70x. Not only that Trivago’s business has started to slow considerably after the pre-IPO outspend, top line growth will go from around 50% to just above 5% growth predicted for ‘18. Not to mention TRVG adj. EBITDA margins at 1.3% are substantially below TRIP’s 24% adj. EBITDA hotel margins. While TRIP’s core hotel growth should be slightly lower (~1% in ‘18), we believe the quality of TRIP’s hotel business is vastly superior to TRVG. TRVG over the past three fiscal years has spent more on SG&A (predominantly TV ads) than total revenue to gain traffic. Whereas, TRIP has a much lower average cost of traffic, with 98% of its traffic being organically sourced (according to Similarweb) compared to TRVG having only 37% organic traffic.

While TRIP may screen expensive, we think having almost half a billion captive users, TripAdvisor will eventually find new ways to monetize these eyeballs more effectively,  just as Facebook has done with its 2bn+ captive users;  we think TripAdvisor will eventually find more effective ways of monetizing more of its “zero cost” user generated content. It is clear the hotel business will be under continued pressure from the OTAs in the short-run, but we think the non-hotel business, with some modest growth assumptions, could become worth the entire enterprise value. And we think the non-hotel business has a very long runway of double digit growth ahead of itself. Investors and sell-side analysts are likely to pay more attention to the non-hotel business as it increasingly influences the consolidated profitability of TripAdvisor. We think at that point, the narrative will likely change to reflect a return of profitable growth that TripAdvisor had just a few years ago.

Risks:

- The hotel businesses decline accelerates and materially takes away profitability from the non-hotel segment.

- Continued lack of execution from Kaufer and the supporting staff.

- AirBnb, Expedia, and Priceline are able to replicate TRIP's non-hotel attractions business.

- Lean attraction based apps overtake TRIP's leadership position within bookable attractions.

Disclaimer: This report is intended for informational purposes only and you, the reader, should not make any financial, investment, or trading decisions based upon the author's commentary. Although the information set forth above has been obtained or derived from sources believed to be reliable, the author does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the above information serve as the basis of any investment decision. Before investing in a security, readers should carefully consider their financial positions and risk tolerances to determine if such a stock selection is appropriate.

At any time, the author of this report may trade in or out of any securities that are mentioned in the report as long or short positions in his own personal portfolio or in client portfolios that he manages without disclosing this information. At the time this report was published, the author had a long position in TRIP either in his personal account or in accounts that he managed for others.

Catalyst

An inflection of TripAdvisors main form of profitability from the hotel segment to the faster growing non-hotel segment.

A possible stabalization in the hotel/meta-search business.

A takeout by a larger OTA or other internet conglomerate.