TripAdvisor: Huge travel platform trading at 9% free cash flow yield

I normally don’t write about US companies but TripAdvisor (TRIP) was too cheap to resist. TripAdvisor recently paid its first ever dividend, (USD3.50 special dividend) so there’s a chance the company could pay dividends in the future. TripAdvisor is currently one of the bigger positions in my portfolio.

TripAdvisor is a travel research platform which allows travelers to plan and book hotels, restaurants and experiences.  TripAdvisor aggregates demand through its huge collection of in-depth qualitative reviews – the app has 830 million reviews and 195 million candid photos. As a result, TripAdvisor is one of the most widely visited travel sites with 460 million average unique monthly visitors. On supply, TripAdvisor allows members to choose from 2.3 million hotels and vacation homes, 300,000 attractions/experiences and 5.1 million restaurant listings. As a platform, TripAdvisor doesn’t take any inventory risk and will get a cut out of any travel booking done on its platform. This platform business model has resulted in high profit margins and free cash flow. In the last 12 months, free cash flow margin was 20% while free cash flow return from equity was 19% (USD319 million free cash flow from USD1.6 billion of shareholder’s equity).

USDm Revenue Net profit Operating cash flow Free cash flow Net cash/(debt)
2008 298 72 N/A
2009 352 102 126 112 N/A
2010 485 139 197 178 111
2011 637 178 218 197 -243
2012 763 194 239 210 245
2013 945 205 350 294 370
2014 1,246 226 387 306 268
2015 1,492 198 382 273 498
2016 1,480 120 321 249 655
2017 1,556 -19 238 174 505
2018 1,615 113 405 344 670
TTM 1,571 118 395 319 933

TripAdvisor was spun off from Expedia in 2011. Revenue has compounded at 14% per year from 2011-18 but net profit has been volatile with no clear trend of growth. However, the company’s business throws out cash flow with free cash flow compounding at 8% during the same period.

TripAdvisor has 3 main sources of revenue and earnings: Hotel Media and Platform (HMP), Experiences & Dining (E&D) and Others (mainly vacation apartment rentals).

TripAdvisor 2018 EBITDA:

  • Hotel, Media and Platform: 78%
  • Experiences and Dining: 11%
  • Others: 11%

The HMP segment provides the bulk of the company’s revenue and EBITDA with most of the company’s revenue derived from click-based advertising for hotels. Unfortunately, this segment is coming under severe pressure with Google pushing its own hotel search results and competing for hotel click-based revenue. Google has also been aggregating reviews from third party sites such as TripAdvisor and Booking in its own search results so the threat is real. In the third quarter of 2019, HMP revenue fell 12% year on year which led to overall EBITDA falling 12%. Ben Thompson of Stratechery has covered this issue in detail on his site.

With deep value situations, there’s a risk of catching a falling knife but TripAdvisor could deliver decent returns over the next 5 years for a few reasons.

Engaged travel community provides a small moat

TRIP reviews and visitors

I was worried to see a quarterly drop in monthly unique visitors but this is probably a result of the company’s recent search optimization efforts. TripAdvisor’s network looks healthy with the company consistently adding more reviews (three million reviews in 3Q19). TripAdvisor membership and app download numbers are also healthy so the company isn’t entirely reliant on Google for search traffic. According to the company, TripAdvisor membership growth “accelerated for the fifth straight quarter” in the third quarter of 2019 with the company adding more than 200,000 new members per day. As of November 2019, the TripAdvisor app is one of the top 10 most downloaded iOS travel apps in the US and UK. TripAdvisor’s visitor count will eventually stop growing but as long as the network is in good health, management has a chance to grow revenue and earnings. TripAdvisor is also developing a loyalty program to encourage repeat usage of its mobile app while reducing dependence on search traffic.

E&D segment is growing rapidly and could be the biggest segment someday

The Experiences and Dining (E&D) segment is the smaller but most promising segment with consumers able to book experiences and restaurants on the TripAdvisor app. TripAdvisor broke out its Experiences and Dining segment for the first time during the first quarter of 2019. This segment is the second largest segment within TripAdvisor with revenue growing 40% in 2018.

TRIP ED

There are a few reasons why the E&D segment is so promising.

Firstly, the travel experience market is a huge USD159 market with 80% of experiences still booked offline so TripAdvisor has a chance to dominate the shift towards online booking. TripAdvisor is already the largest player in experiences with the most supply on its platform so the company has a first mover advantage. TripAdvisor has been focused on growing the supply of bookable experiences with inventory growing 115% in the third quarter of 2019. Having established best in-class inventory, TripAdvisor is now focused on growing demand by improving merchandising and conversion. These conversion measures include recommendations for travellers based on their previous purchases and browsing activity within the app.

TRIP experiences supply

Secondly, the experiences market is highly fragmented compared to the hotel industry so suppliers have limited bargaining power against online travel agents. As a result, TripAdvisor is able to charge 20-25% commissions are possible compared to the typical 15-20% commissions for hotels. A 20% take rate works out to an addressable market of USD30 billion which implies less than 1% market share for TripAdvisor so there’s plenty of room for growth.

Third, restaurants is the star of the E&D segment. TripAdvisor members are able to research and book restaurants on The Fork, an online restaurant booking app and the TripAdvisor app. The restaurants segment generates revenue from charging a fee per seated diner and to a smaller extent – subscription fees for restaurant advertising. Seated diner growth has been accelerating and is even growing faster than the number of restaurants on the app. The restaurants business keeps members engaged on the app even when they are not travelling and provides them with a complete travel experience.

TRIP restaurants supply

Lastly, the E&D segment has huge operating leverage because its expenses are mostly fixed costs. Profitability for this segment has been weak because of investments in onboarding bookable attractions but margins should improve in 2020 with the company turning its focus to improving demand. Higher margins should be achievable. EBITDA margins for the E&D segment reached 24% in the third quarter of 2018 while Open-Table, a restaurants platform achieved 30-40% EBITDA margins.

Hotel segment is down but not out

With the Hotel Media and Platform (HMP) segment seeing a decline in click-based hotel revenue, TripAdvisor is focusing on growing its display advertising business.

TRIP HMP

The company’s Hotel display advertising revenue is a small part of overall Hotel revenue but has grew 3% in the year to date. TripAdvisor is rolling out new ad products such as a self-serve advertising platform which allows advertisers to roll out their display or video ads to TripAdvisor’s 460 million users. This self-serve platform looks promising because of its ability to scale and its targeting ability (eg. last browsed destination, traveller location) so growth could pick up in the coming quarters.

The digital advertising market is growing rapidly and is a huge USD479 billion market according to eMarketer. With only USD153 million of revenue in 2018, TripAdvisor’s display ad revenue is also small relative to other internet platforms such as Yelp (USD907 million) and Twitter (USD2.6 billion). Growing display advertising revenue could compensate for slowing click-based revenue in the HMP segment.

Management

The CEO of TripAdvisor is Stephen Kaufer, 56 who co-founded the company in February 2000 and he has been the CEO since that date. Stephen Kaufer’s interests should be aligned with shareholders since he has 1.9 million shares which are worth USD54 million. His total compensation in 2018 was USD1.9 million which is small relative to the company’s USD118 million net profit in the same year.

The chairman of TripAdvisor is Greg Maffei, 58 who is also the CEO of Liberty TripAdvisor. Liberty TripAdvisor owns 22% of TripAdvisor shares (18.2 million shares of common stock and 12.8 million class B shares) and 57.7% of voting power which implies Liberty TripAdvisor has majority control of TripAdvisor. Greg Maffei is also the CEO of Liberty Media Corp, a John Malone company so TripAdvisor shareholders have to be comfortable with these close ties to John Malone and Liberty Media Corporation. Liberty TripAdvisor has treated minority shareholders of TripAdvisor fairly while John Malone has an excellent track record in capital allocation so I’m not worried.

Risks

A drop in monthly unique visits and membership is the greatest risk for TripAdvisor because fewer users would mean that the platform is less relevant to suppliers and travellers. As we mentioned earlier, TripAdvisor is working hard to stay relevant with the company rolling out initiatives such as a loyalty program and a social media “news-feed”. If the visitor count and review growth tails off, I’ll consider selling my shares.

TripAdvisor also has customer concentration risk. Booking and Expedia are the two largest customers for TripAdvisor and are the largest click-based advertising buyers in TripAdvisor’s hotel business. The growth of the company’s E&D segment will reduce reliance on Booking and Expedia with revenue from these customers falling to 37% in 2018 compared to 47% in 2013.

Lastly, the travel sector is cyclical so a recession could result in a sharp drop in travel bookings, revenue and cash flow.

Valuation

TripAdvisor is one of the most hated travel stocks right now with its share price close to a eight year low. With USD318 million of free cash flow in the last 12 months and a net cash balance sheet, TripAdvisor has a juicy 9% free cash flow yield now. TripAdvisor is one of the world’s largest travel platforms and if the company is able to execute on its display advertising and E&D growth plans, the company should be able to deliver decent returns for my portfolio.

Based on my DCF valuation, TripAdvisor is worth at least USD45 per share (60% upside) even with conservative assumptions.

The following assumptions were used for a 2 stage DCF:

  • Hotels revenue falls 5% in 2020 and remains flat from 2021-23.
  • Experiences & Dining revenue growing 10% per year from 2020-23.
  • Hotel and E&D operating expenses grow 2% per year because platforms have fixed operating costs.
  • 8% cost of capital and 2% terminal growth rate

TripAdvisor could also be a buyout target with the company recently forming a joint venture with China’s Ctrip (now known as Trip.com). TripAdvisor will own 40% of the joint venture and both companies have agreed to share travel inventories. Ctrip gains one board seat at TripAdvisor if the company buys 6.95 million TripAdvisor shares or TripAdvisor shares valued at USD317 million. This deal looks like a good fit for TripAdvisor. Ctrip is one of the largest online travel agents in China which has huge room for growth(~ 10% of Chinese citizens have a passport) while TripAdvisor has a global brand but a small presence in China.

In short, TripAdvisor is one of the world’s most popular travel platforms led by a founder-CEO and a strong track record in compounding cash flow. TripAdvisor’s valuation is at its lowest since 2011. Even if TripAdvisor isn’t acquired, the company’s cheap valuation at USD28/share and long track record of growth should provide me with decent returns over the next five years. Sounds like a good trip!

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