Travel series part 6: Tripadvisor (TRIP) – Riding a dead horse ?
So this is part 6 of my little travel series. Previous posts were:
Part 1 – lastminute.com
Part 2 – Expedia
Part 3 – Trivago
Part 4 & 5 – Flight Centre
The company
Tripadvisor is clearly one of the most well-known names in Online Travel. The company was founded in 2000, but was then acquired by Interactive Group in 2004 and rolled into Expedia. In 2011 the company then was spun out and listed separately. Similar to Expedia in true John Malone style, there are two entities listed: Tripadvisor and Liberty Tripadvisor.
A quick collection of Pro’s and Con’s
+ Founder still on board
+ financially sound, net cash
+ a certain competitive advantage (brand & reviews)
+ mostly organic growth in the past
+ no exposure to flights
+ good capital management (at least on paper)
- business model change risk
- profits declining for 5th year
- Google expenses / competition for reviews
- Trivago direct competitor for Hotel search seems to have better business model
- fake reviews, relevance of reviews declines etc
- Booking.com and Expedia account for large part of revenues (concentration)
As always, I start the analysis with what I think looks bad at Tripadvisor.
That not everything is great shows the chart:
Over the last 5 years, Tripadvisor has underperformed Expedia (blue) and Priceline (green) significantly.
Business model / Issues
Tripadvisor started out as the classic “review” site, collecting and organizing reviews for Hotels and Restaurants. Money was made in the past by advertising and/or generating “leads” for OTA (Expedia & Co).
This model worked quite well for some time. User creating content and then just monetizing it via ads can be good business. But then seem to have stalled at least for Tripadvisor. Revenues actually declined yoy in 2016 against 2015, profitability has been declining since the IPO in 2011. The net income margin has declined from ~28,6% in 2011 to around 8% in 2016.
This is a comparison of Tripadvisor 2016 against 2011:
| TRIP | 2011 | 2016 | Delta | ||
|---|---|---|---|---|---|
| Revenue | 637 | 1480 | |||
| – cost of rev. | -10.9 | -1.71% | -71 | -4.80% | -3.09% |
| – selling & marketing | -209.2 | -32.84% | -756 | -51.08% | -18.24% |
| – technology & content | -57.5 | -9.03% | -243 | -16.42% | -7.39% |
| – G&A | -44.7 | -7.02% | -143 | -9.66% | -2.64% |
| – service fee rel. party | -9.2 | -1.44% | 0.00% | 1.44% | |
| – Depr. | -18.4 | -2.89% | -69 | -4.66% | -1.77% |
| – Amort | -7.5 | -1.18% | -32 | -2.16% | -0.98% |
| – spin off cost | -6.9 | -1.08% | 0.00% | 1.08% | |
| – total cost | -364.3 | -57.19% | -1314 | -88.78% | -31.59% |
| Op income | 272.7 | 42.81% | 166 | 11.22% | -31.59% |
| – interest inc/exp | -0.9 | -0.14% | -15 | -1.01% | -0.87% |
| EBT | 271.8 | 42.67% | 151 | 10.20% | -32.47% |
| – tax | -94.1 | -14.77% | -31 | -2.09% | 12.68% |
| NI | 177.7 | 27.90% | 120 | 8.11% | -19.79% |
The most striking differences are that Tripadvisor needs to spend much more on advertising /marketing than 6 years ago and also the “technology & content” part has become relatively more expensive.
The “Mobile issue”:
Reading the 2016 annual report, Tripadvisor mentions among other issues the following with regard to mobile:
Consumer adoption and use of mobile devices creates new challenges and, if we are unable to operate effectively on mobile devices, our business may be adversely affected. The number of people who access the internet through mobile devices, such as mobile phones, has increased substantially in the last few years and we anticipate that the rate of use of these devices will continue to grow. The mobile market in general remains a rapidly evolving market. As new devices and platforms are released, users may begin consuming content in a manner that is more difficult to monetize. Advertising opportunities may be more limited on mobile devices. In addition, given the device sizes and technical limitations of these devices, mobile consumers may not be willing to download multiple apps from multiple companies providing similar service and instead prefer to use one or a limited number of apps for their hotel, restaurant and attractions activity
Even having an app does not do the trick for Tripadvisor according to this Bloomberg story:
Visitors to TripAdvisor’s mobile site or app become paying customers at about a third the rate that they do on desktop, Kaufer said on a conference call Wednesday.
Alphabet Inc.’s Google is also pressing into TripAdvisor’s territory, both in referral fees for hotel booking and in the core business of reviews. The internet giant unveiled a new app last year that helps travelers plan and navigate their trips, a space TripAdvisor says is core to its strategy as well.
More issues
I think mobile this is one major issue for the classical advertising business models. However, after looking at the competition I would personally see other principal issues with Tripadvisors business model:
- The advantage of own ratings has declined. Both, the OTA’s as well as Google have caught up in this area for hotels and might have already surpassed Tripadvisor with regard to quality of the ratings. Tripadvisor’s ratings are often subject to criticism. Personally, I prefer Booking.com ratings for hotels. For restaurants, in my experience the ratings are pretty ok.
- Compared to Trivago, which only aggregates ratings from OTAs, Tripadvisor’s approach costs more effort and money. Curating and maintaining the community doesn’t come cheap. Hotel & Restaurant ratings are perishable goods. A 5 year old rating for a hotel and especially a restaurant is worth very little, because things can change quickly. So you need to make sure that you get enough new ratings. I also think that younger people don’t write reviews on Tripadvisor any more. They will rather share some pictures etc. via Facebook and Snapchat instead of sitting down and typing a nice review on a computer. Personally, I don’t see a big “Moat” in Tripadvisor’s hotel ratings anymore. It is clearly still an asset but one that is perishable
- I think they didn’t realize how important the “meta search” functionality would be and therefore enabled Trivago to enter and dominate this market within a very short time. They seem to catch up to a certain extent but it is not clear if this is enough
- they also underestimated TV advertising. Looking at Trivago, TV still seems to be a powerful advertising channel
The instant booking feature (story).
Since around 2014, the company focused on doing the booking itself through what they call the “instant booking” feature. Here is an article from 2014 explaining the business model behind this. Interestingly former parent Expedia joined the platform later than the “400 pound gorilla” Priceline.
The story for the last 2-3 years was as follows: We need to spend money now, we will see lower revenues in our “traditional” business (pay-per-click), but in the mid- to long-term, revenues from booking will increase and we will make more money as this is better than pay-per-click (referrals).
However, according to the Bloomberg story mentioned above, this seems to have been mostly just a “story” so far:
TripAdvisor Inc. said it’s pulling back from a major strategic effort to get travelers to book hotels directly on its website after the initiative cut into revenue growth and sent the stock to its lowest price since 2012.
A massive online repository of hotel and restaurant reviews, TripAdvisor is “increasingly agnostic” about how its customers book their accommodations — whether through the site directly or via links to hotel booking sites — Adam Medros, senior vice president of product at TripAdvisor, said in an interview. The company has changed its website to make its “Instant Book” feature less prominent.
and:
Slowing down on Instant Book just means the company is listening to its users, Chief Executive Officer Stephen Kaufer said on a conference call Wednesday.
“We believe Instant Book plays a role in that but not as big a role as we anticipated a couple years ago,” he said. “And that’s okay for us.”
That sounds good but personally I think they could have recognized this earlier. You shouldn’t roll out a feature aggressively to all your users and then decide it doesn’t work the way you thought it would work.
Theoretically, it sounds like a good idea to offer a single point of login (including credit card info etc.), but this only works if you really can ensure that customers can book the cheapest price. As far as I understand, this has been a problem so far as only certain offers could be booked directly.
It also blurs the line between them and their major customers which are the big OTAs. Being a Meta-OTA is much more dangerous for Expedia & Co than being a specialized search engine.
Why does Trivago grow so rapidly then ?
When mobile is such an issue then the question remains: Why is Trivago growing so quickly ?
In Q1 2017, Tripadvisor’s Hotel revenue grew by +4% (vs. Q1 2016), whereas Trivago could increase revenues by +68% and is expecting a 50% revenue increase for total 2017.
Although they do not full disclose how the graph is compiled, Trivago shows the following graph in their IR presentation:
This graph seems to indicate that people search for Trivago more and more and less for anyone else.
How do those guys achieve this ? In my opinion the answer is quite simple: they just outspend everyone else on traditional advertising channels. Those are the Q1 numbers, comparing Tripadvisor and Trivago:
| TRIP | TRIVAGO | Delta | |||
|---|---|---|---|---|---|
| Revenue | 377 | 267,6 | |||
| – cost of rev. | -17 | -4,5% | -1,1 | -0,4% | 4,1% |
| – selling & marketing | -207 | -54,9% | -231,5 | -86,5% | -31,6% |
| – technolgy & content | -59 | -15,6% | -11,7 | -4,4% | 11,3% |
| – G&A | -35 | -9,3% | -8,9 | -3,3% | 6,0% |
| – Depr. | -19 | -5,0% | 0 | 0,0% | 5,0% |
| – Amort | -8 | -2,1% | -2 | -0,7% | 1,4% |
| – total cost | -345 | -91,5% | -255,2 | -95,4% | -3,9% |
| Op income | 32 | 8,5% | 12,4 | 4,6% | -3,9% |
Although Trivago is only around 2/3 in sales compared to Tripadvisor, they are already outspending Tripadvisor with regard to marketing and selling. According to Trivago, 95% of their selling & marketing” is actually plain advertising:
Advertising expense (which made up 95% of total selling and marketing expense) was driven by higher advertising spend across all regions with €86.6 million, €81.8 million and €50.5 million in Americas, Developed Europe and RoW, respectively, compared to €50.0 million, €58.0 million and €24.2 million, respectively, in the first quarter of 2016.
If we look at Tripadvisor’s annual report 2016, only (554/756)= 73% of selling & marketing are direct expenses, the rest represent salaries of own employees, Adjusted for this, Trivago’s advertising spend in Q1 was 219,5 mn USD vs. (0,73*207)~152 mn USD for Tripadvisor.
Also Trivago’s other expenses look a lot slimmer than Tripadvisor’s. Maybe the former good years have put a lot of “fat” onto Tripadvisor’s organization.
Overall, in comparison, Trivago’s business model looks more streamlined than Tripadvisor in its current form.
The question is clearly if Tripadvisor is “riding a dead horse” with relying on its ratings and content. For the moment, the much slimmer Trivago approach looks more succesful, but in online travel things can change very quickly.
As the post got quite long, I will follow-up on the positive side with another post very soon……
value and opportunity 
Interesting story about the issues of Tripadvisor’s business model:
http://www.jsonline.com/story/news/investigations/2017/11/01/tripadvisor-removed-warnings-rapes-and-injuries-mexico-resorts-tourists-say/817172001/
Reviews is a tough business no doubt. And this was a disappointing lack of concern by TripAdvisor – hope they learn from it and improve.
A german competitor for the “Non hotel” segment:
http://www.businessinsider.de/getyourguide-raises-75-million-for-travel-booking-platform-2017-10?r=US&IR=T
Thanks for sharing. The opportunity is well articulated by this company in the article. TripAdvisor though has a bigger supply of tours and attractions(growing just as fast if not more) which they can serve to their much bigger audience – plus one of your biggest concerns in this blog – monetization is not a concern in this segment – see latest Q3 numbers – its working brilliantly.
I noticed that you didn’t mention the “non-hotels” business at all. I think it’s a hidden gem, more specifically the “attractions” business, there is practically no competitor and they are poised to monetize this opportunity – which they seem to be doing quite well and without advertising i might add.
Good point. In Q2, the result of non-hotel bacame positive. However they need to show more in htis area to justify the curretn valuation in my opinion.
As far as valuation goes, peak free cash flow in 2015 was 400+ mm$ i think, if they can get back to that by fixing the instant book debacle, it looks pretty attractive to me @ 5bn$ with practically no debt. No credit for growth here which should not be that difficult to achieve in a growing category.
hmmm, assuming that they will regain previous profitability is quite aggressive in such a fast changing environment. Just look at Trivago….
“hmmm, assuming that they will regain previous profitability is quite aggressive in such a fast changing environment. Just look at Trivago….”
well, it’s quite interesting to think whether they can do that or not. personally, i think this is completely self inflicted – practically a business model change(click based to instant book), but time will tell i guess. also, they aren’t going back – so pointless discussion anyways.
i read your trivago post and like you i’m not sure it’s a viable business at all. tripadvisor on the other hand is completely different, they have a unique value proposition – which is more and more prominent in the “mobile-only” world.
anyways, the real reason i like it is non-hotels – at “tech-like” valuations, it would easily be valued at 3bn$(10x rev). their monetization has just started and they are converting more and more attractions to “bookable attractions” every quarter. the TAM size here is something like 100bn$.
personally, i would be happy if they would just milk the hotels business for cash, and focus on non-hotels…
To be honest, assigning 10x muliples (“tech valuation”) is not part of my valuation process. One should also be aware that some of Trip Advisors decline in margins comes from the fact that they missed mobile for a very long time. For me it is not 100% sure if they can get back to their old margins ever. But I agree, the “Attractions” market is interesting, if they are succeeding in mobile.
TRIP influences on online 55% of travel decisions and has more restaurant reviews than Yelp. Not to mention the ‘signalling’ from the yearly ‘best’ lists and their ubiquitous stickers which are everywhere.
I’m not sure to what extent one can analyse a business using only personal preferences/anecdotes (e.g. “I prefer Booking.com ratings”) and ignore data collected from millions of other people who aren’t you.
Allow me to remark that you might not have read the whole “Travel series” on my blog. I also assume that you even didn’t read the post itself. The issue is not if I like Tripadvisor ratings or not but that in my opinion the business model itself seems to be a lot weaker than some years agao as shown by the “hard numbers”.
“Influencing” is nice but it seems to be harder and harder for TRIP to monetize it. But anyway, there is always the possibility that I am totally wrong and Tripadvisor will be a great investment.
I actually read (and liked) the whole series, hence why I’m here at part six. It actually prompted me to take a look at each company mentioned in the series.
I just happen to disagree with you slightly on TRIP (if that’s not a crime?) but I dont own shares in it.
I don’t think an experiment with their business model should be viewed as permanent when their influence is as high as ever (it seems you concede this possibility too). If you own a store and you experiment with how you charge your customers, I don’t think is indicative of the normalized earnings power of your store, especially when you have as many potential customers as ever.
I just saw lots of points in your post(s) about how reviews are losing relevance etc., but little in the way of evidence for it — apart from citing they are making less money from it which is tautological seeing as, by your own analysis, was intentional in the first place.
Reasonable minds can disagree.
Point taken. I was just irritated because my disklike of Tripadvisor was explicitly not focused on my personal experience. But clearly, disagreements about stocks and prospects make the stock market interesting. If we would all aggree on everything, then it would be a lot less fun.
Revisiting TRIP past few days after owning post EXPE spin off. Co feels adrift in many respects and “curated” (sort of) reviews not much of a moat (thanks for above thoughts on this)
Curious – are you on Twitter by any chance?
nope, no twitter. I am too slow for that 😉
I’m just happy your blog is 99.5% English… “equity” investment culture is alive and well in Europe…
Came across this change to MAR cancellation policy: “Marriott/Starwood properties have had new cancellation policies added for all bookings after June 15th. According to an official comment by Marriott (via Travel Skills) guests will be required to cancel their room reservation by midnight 48 hours prior to arrival. The previous policy was that guests were allowed to cancel their room the day before check in. Some Starwood/Marriott properties and bookings have more restrictive cancellation policies than this and they will remain unchanged, this change will also not be applied to Design Hotels. Marriott claims that the change was made so hotels could make rooms available to guests seeking last minute accommodations.
I’m not a fan of this change and I suspect it’s more to do with Marriott being able to use dynamic pricing and last minute booking websites/apps more aggressively without letting existing customers rebook than it is to do with allowing regular last minute bookings. That’s fine, it just means that I’m unlikely to book a SPG/Marriott property when I need that added flexibility (something I rarely actually use, but I like the piece of mind of).”
Hi,
I had TripAdvisor on my watchlist for almost 2 years, but I am still not sure if I should pull the trigger – although the price is more interesting now.
– Q1 showed a little improvement on the monetization front – at least in the US – after the instant booking transition (internationally they rolled it out later).
– On the other hand this came with an increase in marketing/sales expenses.
– They plan a TV campaign this year which, according to my understanding, will be financed through a re-shuffeling whithin the marketing budget, so the overall budget should not change that dramatically. Kaufer made some comments on this in the Q1 CC: https://seekingalpha.com/article/4071736-tripadvisor-trip-q1-2017-results-earnings-call-transcript?part=single
This instant booking thing still seems like a big bet to me, but I am still having problems with evaluating this change. And consequently with valuing the shares. So, I still have TripAdvisor on my watchlist only, looking forward to your next post.
Thanks,
Tom
Thanks
I am invested in Expedia. I have been looking and thinking about Tripadvisor for a while. Trip advisor has a lot of traffic. But as you show with the growth of Trivago, this industry is fast moving and a bit risky. So far I have not invested in Tripadvisor
I have checked them on my value stock screener https://www.finanzoo.de/en.html and I also see them rather weak from a fundamentals point of view. In my scoring system they reach only 21 out of 100 possible points.