TripAdvisor: Isn't Worth The Trip; Sell

seekingalpha11-08

TripAdvisor's stock plummeted after actively seeking a sale but failed to find a buyer, highlighting the market's (duly) skepticism about its competitive edge.Valuation challenges arise as profitable ...

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Its user-generated content is also challenged by AI tools and social media.Investment advice: TripAdvisor is not worth the trip.Editor's note: Seeking Alpha is proud to welcome Bet Size Matters as a new contributing analyst. You can become one too!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"TRIP":"猫途鹰","BK4588":"碎股","BK4077":"互动媒体与服务","BK4585":"ETF&股票定投概念"},"translate_title":"猫途鹰：不值得一游；出售","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TRIP":0.9},"content_text":"TripAdvisor's stock plummeted after actively seeking a sale but failed to find a buyer, highlighting the market's (duly) skepticism about its competitive edge.Valuation challenges arise as profitable segments aren't growing and growing segments aren't profitable.TRIP is outcompeted by large competitors that enjoy network effects better. Its user-generated content is also challenged by AI tools and social media.Investment advice: TripAdvisor is not worth the trip.Editor's note: Seeking Alpha is proud to welcome Bet Size Matters as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » winhorse/iStock Unreleased via Getty Images  Advised To Skip: Why TripAdvisor Isn't Worth The Trip For Investors TripAdvisor (NASDAQ:TRIP) struggles with weak network effects and a limited competitive edge when competing with stronger platforms like Booking Holdings (BKNG) and Expedia (EXPE). Its attempted sale in 2024 signals weak management confidence and a lack of clear direction, as its stock plummeted after no sale was finalized. Its main revenue driver, Brand TripAdvisor, is profitable but shrinking, while growth segments Viator and TheFork have yet to prove sustainable profitability. With stagnant core growth and unproven profitability in newer ventures, I recommend avoiding investing in TripAdvisor until it demonstrates sustainable growth and profitability. Firm's Direction It's rare for a successful company to actively seek a sale—typically, only struggling ones do. Failing to do so is even worse. On Feb 12, 2024, TripAdvisor announced it was considering a potential sale. It formed a special committee to explore the possibility of selling the company. Before this announcement, its price was around $18.53. This news sent the stock to jump to $25.4 in after-hours trading, implying a heavy premium. However, the company announced no sale in May, and the stock price plummeted, hovering around $15 in October. I saw that some analysts on Seeking Alpha have not given up hope of a potential sale. However, I think it is unlikely that things will change dramatically soon. The open seeking of a sale is quite unusual. It is not common for a promising company with a confident management team to do so—the sale, therefore, could possibly reveal a lack of confidence and a loss of direction in the management team. One might argue that such an interpretation is too harsh. Yes, it would be different if the announcement was made with an interested buyer. However, the company emphasized at the initial announcement that no decision had been made, and the committee formation was simply an exploratory step. Indeed, the whole thing was exploratory. I think the failure to find a buyer shows a lack of interest from competitors or potential entrants. It could be that, the existing competitors do not view TripAdvisor as a threat and have no interest in picking the company up to snap competition, and potential buyers do not see the firm's future as enticing enough. The plummet in stock price shows that the market shares the same concern as I do, but I think the problem with TripAdvisor runs deeper than that. Its lack of a clear vision about the future can lead to a sluggish long-term performance in the coming years, and wise investors are advised not to take the trip with TripAdvisor. 2024 Performances I will next dive into TripAdvisor's three segments and comment on their profitability and growth prospects. I note that TripAdvisor uses EBITDA as the main profitability metric, but I think investors should be cautious not to rely too much on EBITDA, as it can present an overly optimistic view of profitability. EBITDA excludes significant recurring expenses like stock-based compensation, depreciation, and amortization. These are real, recurring, and substantial operating costs, that affect the company's performance measures significantly. In TripAdvisor's case, net income is only a small fraction (between -125% and 32%) of adjusted EBITDA. TripAdvisor EBITDA to Net Income Reconciliation (TripAdvisor 2024 Q3 Investor Presentation)  Brand TripAdvisor: Profitable But Revenue Is Shrinking Brand TripAdvisor is the largest and most mature segment of TripAdvisor, accounting for 48% of its revenue as of Q2 and 46% as of Q3 2024. It relies heavily on its vast user-generated content, including reviews, ratings, and forums, which fosters trust and authority in the travel industry. However, competitors like Booking Holdings and Expedia offer more integrated platforms that seamlessly combine consumer search with bookings, offering users a smoother experience for flights, hotels, and other travel services. Their strong loyalty programs and end-to-end solutions also reduce reliance on TripAdvisor's metasearch functionality. To stay competitive, TripAdvisor needs to innovate further by improving its direct booking capabilities. TripAdvisor risks losing market share if competitors continue improving their booking processes and attracting users with loyalty perks and exclusive deals. The Brand TripAdvisor segment shows a decline in year-over-year revenue in the first three quarters of 2024. Its revenue dropped from $290 million in Q3 2023 to $255 million in Q3 2024, a 7% year-over-year drop. This is a worrisome signal, especially alarming when its peers all show solid revenue growth of high single or low double-digit growth. TripAdviser Q3 2024 Segment performances (TripAdvisor 2024 Q3 Investor Presentation)  Viator: Growing Fast, But Far From Profitable Viator is experiencing rapid growth, with a 25% year-over-year increase in revenue. However, it remains unprofitable, with an EBITDA margin of just 2% in Q2 and 3% in Q3 2024. Since EBITDA doesn't account for key costs, GAAP profitability is still far off. Viator will need time to prove its long-term profitability and competitive edge. Viator is well-positioned in the booming travel experiences market. Its strength lies in offering a wide range of experiences across global destinations. Despite its potential, Viator faces stiff competition from Airbnb's (ABNB) more personalized platform or from Booking.com and Expedia, which provides a one-stop shop for travel needs. Their loyalty programs also make customers more likely to keep shopping for related experiences after booking their air tickets and stays.  TheFork: Low Margin Business And High Uncertainty TheFork is a leading platform for restaurant search and reservations in Europe. Its business model is based on commissions from restaurant bookings and subscriptions or marketing fees restaurants pay for visibility. While TheFork grows fast, it operates in a relatively low-margin industry, as restaurant reservations are not a business with a wide moat (entries can be easy). Thus, it doesn't offer as high profitability as other travel segments. Currently, it is losing money on an EBITDA basis (and you know I, T, D, and A are all actual, substantial expenses, right?) TheFork has the potential to be profitable in the future. Still, profitability can be uncertain as it has several competitors (such as OpenTable, Resy, Yelp, etc.), and the success depends on TheFork securing a high adoption rate among restaurants and diners. Valuation The dilemma is that the profitable segment is not growing, and the growing segments are not profitable. Valuing TripAdvisor is challenging because its three business segments are at different stages of growth. The profitable segment, Brand TripAdvisor, is profitable but recently stagnant, or even declined, in growth. The other two segments, TheFork (restaurant reservation platform in Europe) and Viator (online activities booking platform), are growing but still haven't achieved positive profitability. Thus, the earning streams are not homogenous and require different valuation multiples. Applying a single valuation multiple to the entire company would be misleading, as its components demand different multiples. To address this, I have used a sum-of-the-parts approach, where each component is valued using a multiple comparison with its peers, and are added up to arrive at the firm's value. Brand TripAdvisor: The sales from 2021-2023 are $665, $966, and $1031 million, respectively. Operating income for 2023 was $148 million. Looking at its peers, Airbnb has a P/E ratio of 18, and Booking.com has a PE multiple of 25. Applying a P/E of 15 (note that the earnings quality is lower at Brand TripAdvisor than at the other two, we arrive at a value for the segment around $2.2 billion. Viator: The long-term profitability of this segment remains uncertain, and with no detailed breakdown available for Airbnb Experiences, I've used Airbnb's P/S ratio for valuation. The sales from 2021-2023 are $184, $493, and $737 million, respectively. We take Airbnb as its peer and assign an EV/Sales ratio between 1 and 1.2. This would give a segment value between $0.7 and $0.9 billion. TheFork: Since restaurants are usually low-margin, highly competitive businesses, they may be reluctant to pay higher commissions, making the margin low. The sales from 2021 to 2023 are $81, $126, and $154 million, respectively. I take Yelp as its peer, and Yelp has an EV/Sales ratio of 1.4. A range of 1.3 to 1.6 would give a segment value between $0.2 and $0.25 billion. Adding together, my calculation gives TripAdvisor an enterprise value between $3.1 and $3.4 billion. Removing the debt value of $890 million as of Dec 31, 2023, the equity value is $2.2 to $2.5 billion. With 139 million outstanding shares, a per-share stock price would be between $15 and $18. Thus, the stock is fairly valued, leaving a limited margin of safety. On top of that, keep in mind that the odds are not stacked in its favor. Its largest segment, Brand TripAdvisor, is lagging in competition and not growing; its growing segments are far from uncertain to be consistently profitable. I always use SP500 as a benchmark to evaluate individual stock investments. In this case, there seems little reason to believe TripAdvisor beats SP500, and thus, I recommend a sale. Risks The network effect is the key in the online travel industry, but it is not in TripAdvisor's favor. The negative loop can go on and make it underperform relative to peers. Looking at the financials and valuation, one can see that TripAdvisor falls behind its competitors regarding profitability and sales growth. One might wonder why TripAdvisor underperforms its peers. The main reason is that the industry is a classic two-sided market where the network effect plays an important role. The online travel industry is a two-sided market, as more customers attract more suppliers, and more suppliers attract more customers, creating a self-reinforcing cycle. Both customers and suppliers rely on the platform. For customers, travel costs a substantial part of their household budget, and they know little about the destination; thus, they rely on the platform (e.g., the reviews to select hotels/activities). For suppliers, they need the platform to access the customers. Large players like Booking Holdings, Airbnb, and Expedia benefit from their scale: they offer diverse and enormous travel options; large volume allows them to reduce per-unit cost and improve profit margin. This makes it tough for smaller competitors like TripAdvisor to keep up. TripAdvisor, primarily a metasearch and review platform, suffers from weaker network effects than its competitors. While it touts its large base of user-generated content, it fails to convert reviews into direct revenue effectively. Without a strong direct booking functionality, users may only browse the contents but book outside the platform. Additionally, Google search and AI-driven travel tools further threaten TripAdvisor's core business, as users bypass the platform to obtain valuable travel information and reviews. Finally, users increasingly get travel recommendations from social media, such as TikTok or Instagram, as those platforms also exhibit large network effects in content production. These indirect but powerful competitors erode TripAdvisor's core competitive edge (its valuable user-generated content), and its monetization potential is curbed. Conclusion  To stay competitive, TripAdvisor must enhance its booking functionalities and monetization ability. But it's an uphill battle as the network effects in this industry are strong, and it is lagging behind its large competitors. The company needs to speed up the growth in the more promising segments and show its profitability. Until then, the investment recommendation is clear: skipping the trip with TripAdvisor is best.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-2","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481179937"}