Tripadvisor: 40%+ Upside Potential As Viator Emerges In The Driver's Seat

seekingalpha11-09

I maintain a Strong Buy recommendation for Tripadvisor due to Viator's growth, strong balance sheet, and potential strategic acquisitions.Viator's revenue and profitability trends are positive, with ...

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(NASDAQ:TRIP) shareholder since as far back as the pandemic lows, though have taken profits periodically while always believing in the long-term potential. While such a strategy (profit taking in slices) doesn't always turn out, it has proven fruitful in this case. One of my most eager trades in the market this year was repurchasing TRIP following the early May 2024 selloff after company management decided to walk away (temporarily, at least) from discussions to sell the company to an acquirer. I had previously exited all of my shares on the run-up to the high $20 range. That had been an easy sell decision because I figured there was no use holding out for Tripadvisor's long-term potential if it was going to be held within a larger company. Two good things happened when TRIP management exited the merger negotiations: 1) It brought the long-term standalone potential back into play, and 2) the equity became ~30% cheaper. Seeking Alpha My long-term optimism in Tripadvisor is a function of:  A strong confidence in the Viator business. The declining weight of the branded \"Tripadvisor\" business. A strong balance sheet.   Furthermore, of course, prior acquisition interest always lends comfort that the company is desired by those with large pockets. My early-May article titled, \"Tripadvisor Plummet On M&A Rejection Brings The Stock Back Into Play\" corresponds to the selloff highlighted in the chart above. Meanwhile, I wrote an update article in August where I described TRIP as a \"High Conviction Buy\". My timing of that 2nd article turned out terribly, as the stock decline proceeded to extend to all-time lows. With that said, TRIP shares were ~10% higher (than the date of my August follow-up article) going into the November 6th, 2024, Q3 earnings release. Tripadvisor Q3 2024 Results Revenues For the quarter ended September 30, 2024, Tripadvisor reported ~flat (y/o/y) revenues of $532 million. Q3 is the company's busiest quarter due to the summer travel season. TTM revenues are only about $1.82 billion, so the recent quarter represents nearly 30% of that. Meanwhile, revenues for the first 9 months of the year rose about 2% as compared to 2023. While that's no reason to get excited, what's interesting is when you look at the internals. Tripadvisor Here we can see that Tripadvisor's branded business suffered another steep quarterly revenue decline, while Viator and TheFork drew double-digit gains. Having divisions that flip between growth and decline would be regrettable, but that's not the case here. Tripadvisor's legacy business, which accounted for 57.6% of the revenue pie just 2 years ago, now only accounts for only 44.4%. Hidden beneath the headline flat revenue picture, TRIP has a legacy business that has been bleeding for some time, along with 2 emerging growth businesses that contribute a bigger share to results each and every quarter. Key observation: As expected, Q3 2024 was the first time in the company's history that Viator revenues exceeded those of branded Tripadvisor. Profits TripAdvisor reported Q3 GAAP Earnings of $39 million, or $0.27/share. Officially, that's better than $27 million and $0.19/share for the same quarter in 2023 but, in truth, performance worsened. That's because the company incurred ~$18 million of restructuring/reorg costs in the year ago quarter. On an apples-to-apples basis, it appears that earnings fell from $45 million to $38 million (ignoring the tax impact of the restructuring charges). Non-GAAP EPS fell from $0.52 to $0.50, even though the recent quarter's result beat analyst estimates. Meanwhile, adjusted EBITDA fell from $127 million to $123 million. It was a pretty disappointing quarter, especially considering that 2024 was a Summer Olympics year. I had high hopes for the company's Q3, but those hopes were dashed way back in August when company management made cautionary comments about macro demand trends and headwinds during their Q2 conference call on August 6, just a handful of days before the end of the Olympics. If the company wasn't seeing positive Q3 trends at that point, they probably weren't going to happen. So coming into the Q3 report, my expectations were not high. TripAdvisor certainly delivered to those expectations, and if I was surprised by anything, it was the stock's rise to $17.76 during trading on November 6. The 11% post-earnings decline in TRIP stock isn't surprising. However, there's a very appealing long-term story playing out here, in my view. Forward Outlook My bullishness continues to center on the Viator business. For those unfamiliar with this segment, Viator.com is an online platform that allows tourists (usually) to book day tours (mostly) from local operators. In fact, just last week, Yours Truly took this day tour to the mountain hot springs of Tolantongo, 4 hours outside of Mexico City. Viator.com I'm very bullish on Viator's business for two reasons. First up is the flexibility for fickle tourists (like me) who don't want to be tied down to a 10-day or 14-day vacation tour. I also believe that the emerging generation((s)) of travelers will appreciate the day-tour style of traveling that allows them to take in only the sights they want to experience. Second, I believe an established, international platform like Viator realizes incredible competitive positioning. The \"trust factor\" is important when booking in far-away places, and it can get dicey trying to make arrangements with local operators, sometimes in foreign languages. The other thing that invariably happens, is that several local tour operators offer essentially the same experience and end up jostling for position on Viator's platform. So consumers can feel confident that they're getting a competitive price and Viator benefits from a position of power over the local operators. (NB: There were at least 5 different operators offering essentially the same Tolantongo experience I enjoyed last week). Viator certainly seems to house in a more appealing environment than Tripadvisor's legacy hotel meta business that is flush with big competitors with big pockets. I see Tripadvisor at a competitive disadvantage with its legacy business, quite opposite to how I feel about the Viator segment. Author, using data from Tripadvisor Viator is clearly the future of the company, but not all investors likely realize that, and to some degree the future is now! Corporate sales growth ($) is being driven by Viator, and its forward impact should only increase as it takes a larger and larger share of the total revenue pie. It's a mathematical certainty that if Viator continues to grow ~10% and branded Tripadvisor continues to shrink by about the same rate, the company's overall topline $ growth will be picking up. TheFork is also on a nice arc, but it will take much longer for this segment to have a meaningful impact on overall results. Viator's margin profile is also improving, even though it is still subject to the same seasonality patterns as branded Tripadvisor. The overriding point is that both Viator's revenue and profitability trends are positive. Author, using data from Tripadvisor For the recently completed quarter, the segment's adjusted EBITDA margin rose from 6.9% to 11.1% year-over-year. Management delivered a rosy view for Viator in the Q3 conference call, stating: In October, we saw positive trends in Viator with meaningful acceleration from where we exited the third quarter...while Viator and TheFork will deliver revenue growth higher than expected in our last update. So there's an acceleration of expectations here for the 2 growth segments, and that's precisely what shareholders would like to hear. And while company management isn't giving up on the legacy Tripadvisor business and is expecting a slowing of the bleed in Q4, that's not really what will drive sentiment substantially higher. Segment Estimates Viator For the Viator segment, based on the strong trend, management comments, and guidance surrounding easier Q4 comps, I'm projecting Q4 revenues of $184 million and adjusted EBITDA of $23 million (~12.5%). Last winter, the Q1 adjusted EBITDA loss exceeded Q4's contribution by ~$12 million, but this winter I'm hoping the 2 \"low season\" quarters can break flat in aggregate. That would leave a TTM-adjusted EBITDA contribution of $40 million for Viator by the time Easter rolls around next year. I'll further estimate Viator's FY 2025 adjusted EBITDA at $65 million. It wouldn't surprise me one bit if the Spring merger talk breakdown centered around a disagreement over Viator's valuation. There's a lot of potential here. Some readers will take issue with this comparison, but I believe Viator has notable comparability to Airbnb, Inc. (ABNB), including the feel and functionality of their platforms. In one case vacationers are booking a place to stay, and in the other case, they're booking a travel experience (with plenty of competing options). I also think Airbnb's current growth expectations are reasonable targets for the Viator business. ABNB shares are trading at a forward EV/adjusted EBITDA of ~20x. Airbnb has much less potential for margin growth than does early-stage Viator, so I'm going to run with a base case 30x forward EV/adjusted EBITDA multiple for the day tour platform business. While some readers might scoff at that multiple, my gut instinct is that Tripadvisor management would be hard-pressed to even let it go at that level. At 30x I reach an estimated fair value for Viator of $1.95 billion. At a more bullish 35x, this segment alone would be worth more than the entire company's current market cap (and approximately the EV as well). TheFork Although restaurant booking and discovery segment TheFork delivered the strongest growth of any segment (+17%) in Q3, it remains somewhat of an unknown entity. I haven't studied the platform incredibly closely, but I'm skeptical about its ability to carve a meaningful niche against all the other dining platforms out there. TheFork, as well as many of Tripadvisor's businesses, including Viator, may benefit from generative AI in driving better customer conversions. So there's potential for this segment to be a big winner, but it's just too early to tell. One advantage of TheFork within Tripadvisor's portfolio is that it (understandably) looks less seasonal than all the other businesses, and may serve as a moderating influence next to Viator and branded Tripadvisor's fluctuations. TheFork has posted 2 quarters of adjusted EBITDA profitability now ($3 million and $5 million). As noted in the quote from the prior section, management has increased its revenue growth view for TheFork, along with Viator. Let's assume it can duplicate its $49 million in sales (Q3 2024) for Q4, along with similar margins. That would potentially give it a positive $9 million adjusted EBITDA for FY 2024. I was going to estimate a 15x adjusted EBITDA multiple here, and just by chance that lines up with where Yelp Inc. (YELP) is trading on a trailing basis. YELP, of course, has a good amount of business overlap with Tripadvisor's restaurant and hotel review line. The two companies hold similar market capitalizations but YELP trades at lower profitability multiples and has experienced higher growth recently (although that might change). Let's therefore conservatively estimate a $135 million value for TheFork. This could turn out to be embarrassingly low, but without a deeper study of this small segment, I'd rather side with caution. Branded Tripadvisor While the legacy segment may seem like a write-off due to the industry headwinds it faces and its melting ice-cube status, it generally possesses good margins. In fact, profitability for the segment was holding up pretty well as recently as Q1, when adjusted EBITDA rose 8% despite a 2% weaker top line for branded Tripadvisor. Unfortunately, things have fallen off the wagon (or the wagon has fallen off the road) more recently. Q3 EBITDA fell a troubling -21.6% (year-over-year). Author, using data from Tripadvisor Unfortunately, while Q4 margins from branded Tripadvisor have tended to be low points in past years, in the November 6 conference call, management guided margins all the way down to 20%! In doing some back-of-the-envelope math, with sustained 9% topline decreases and margins bouncing back to 25% after Q4, I estimate the Branded Tripadvisor segment may still deliver about $210 million in adjusted EBITDA over the next twelve months. With such an impaired business, I'm going to apply a multiple of 3.5x, leading to a ballpark fair value estimate of $700 million for the legacy Tripadvisor segment. Valuation & Conclusion Tripadvisor's poor Q3 2024 showing was disappointing, but not unexpected after cautionary conference call comments from August. Thankfully the recent results were coupled with 2 positives:  Affirmation that the Viator segment is now carrying the mantle for the company, which should begin to draw increased investor and analyst focus, and; Encouraging management comments about Q4 expectations for the Viator and TheFork segments.  Using the above analysis and segment fair value estimates, I reach a fair value range for TRIP shares of: Author Price Target Calc I not only reiterate a Strong Buy recommendation on the basis of the above, but should remind investors that a strategic combination/acquisition remains quite possible for Tripadvisor. In this week's Q3 conference call, management made the below remark related to its prior stock buyback program: \"During the quarter, we had no share repurchase activity. Although we have not terminated the program, we have been in the past and may continue to be limited in our ability to purchase shares in the public market due to ongoing consideration of a variety of potential strategic alternatives.\" It sounds to me that there's still a potential suitor in the picture whose eye is also on TRIP's $1.1 billion cash hoard. Depending on the timeline and how Viator performs in the quarters to come, the price tag on the business could rise much higher than the above target price range (and in fact, shares of TRIP reached as high as $28.76 back in March). Risks  I view the following two risks as having the highest potential to impair the bullish thesis on TRIP:  Management performance. While branded Tripadvisor does operate in a highly competitive space, it's possible that the business's troubles are tied to mismanagement. Any such mismanagement of the emerging Viator business would damage the shareholder potential. 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