It’s turning out to be a rough year for TripAdvisor (TRIP). While growth has remained strong, it has not been enough to whet Wall Street’s appetite.
Here’s the run-down on the TripAdivisor earnings: Revenues jumped 39% to $354 million and profits fell from $56 million, or 38 cents per share, to $54 million, or 37 cents per share. On an adjusted basis, the net income was $71 million, or 48 cents.
True, TripAdvisor earnings beat on the top line, but there was a miss on profits, where the Street was looking for 60 cents per share. TRIP stock posted a substantial miss and dropped about 14% in Wednesday’s trading.
The drop sure wasn’t pretty, but volatility isn’t anything new for TRIP stock. As always with a selloff of this magnitude, the question is whether the stock is giving investors a cheap buying opportunity … or just sending them a warning.
To figure out what’s going on with TRIP stock, let’s take a look at the pros and cons.
TRIP Stock Pros
Online Travel Juggernaut: TripAdvisor, which allows users to provide reviews of their travels, has a extensive global footprint, with web properties in 44 countries. TripAdvisor gets 115 new contributions per minute — in 28 different languages. In all, the company has amassed almost 200 million reviews. User growth has been strong too. In Q3, monthly unique visitors came to 315 million, up 20% on a year-over-year basis.
Innovation: TripAdvisor has been aggressively investing in new offerings. For example, the company is in the early stages of rolling out Instant Booking, which makes it easy to reserve hotels and restaurants. Next, TripAdvisor has been using Big Datato improve the user experience and achieve higher click-rates. And yes, TripAdvisor has been ramping its efforts in mobile. Consider that 50% of its users are accessing the platform via smartphones and tablets.
Growth Opportunities: TripAdvisor has been leveraging its platform to move into adjacent categories. One is restaurants. By adding instant reservations, the business has seen a spurt in growth (there are currently 2.4 million listings). Another extension of the TripAdvisor platform is attractions, thanks to the acquisition of Viator, which have helped increase demand for bookings of hotels and restaurants. And finally, TripAdvisor has moved into the vacation rentals business. TRIP is in the early stages with that business, but there are already 650,000 listings — up 40% on a year-over-year basis.
TRIP Stock Cons
Valuation: Even with the drop in TRIP stock, the valuation is still far from cheap, with a price-to-earnings ratio of 50. That valuation compares to a P/E of 28 for Priceline.com (PCLN) and 34 for Expedia (EXPE). Besides, TripAdvisor earnings are expected to remain under pressure. For the most part, it looks like the company will continue to invest heavily in its new growth categories as well as mobile apps. But TV advertising is also expected to increase in 2015.
Competition: While TripAdvisor is the clear leader in the travel reviews market, the competition is getting more intense. There are many well-funded startups, like Hipmonk and HotelTonight, that are trying to get a bigger piece of the pie. But mega players, such as Google (GOOG) and Baidu (BIDU), have also been making moves in the category. Oh, and there is always the possibility that Facebook (FB) could be a player. After all, social media seems like a perfect fit for travel reviews.
Macro Problems: So far, TripAdvisor has continued to post strong top-line growth. But this could face headwinds. Let’s face it, Europe remains sluggish and China is decelerating. So it could get tougher for TripAdvisor maintain its pace. After all, other top travel operators are indicating slower growth. Just look at powerhouse travel site Priceline.com, which provided weak guidance and is down 10% in the past few days.
Verdict on TRIP Stock
Even though TripAdvisor faces more competition, the company still has a tremendous brand and rich content. More importantly, it has continued to invest in new products and has expanded into adjacent markets. The traction in mobile is also encouraging. Over the long-haul, these efforts should have a solid payoff.
However, the macro situation is looking kind of scary, and, yes, there could be a softening of the growth. And given the high valuation of the stock, this could mean there is more room on the downside.
So then should you buy TRIP stock? Not now — the valuation is just too high.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
