Last year I took an unforgettable Hawaiian vacation with my wife and daughters, and before we even went, I felt like I had already been there thanks to TripAdvisor Inc (NASDAQ:TRIP). TripAdvisor is a global online travel company that aggregates tourists’ reviews and opinions about destinations, accommodations, restaurants and activities.
The Business of TripAdvisor
Back in 2000, Steve Kaufer tried to research an upcoming trip to Mexico and came up empty. Frustrated, he started an online forum for travelers to post their honest reviews and recommendations, and today TripAdvisor users add 280 new contributions, in 48 markets across the globe, per minute.
Now this size is its own asset, with each new review and posting making the site that much more valuable, in a self-reinforcing network effect.
TRIP stock makes money primarily from click-based advertising, but as it grows, it’s diversifying its revenue stream nicely, with money coming from display ads, subscription advertising deals and reservations. Advertisers love that TripAdvisor’s visitors usually have high intent to buy, and visitors love the candid, helpful reviews and photos from other travelers.
But the company has even bigger goals than playing matchmaker.
As Kaufer said in an earnings call in early 2015 “Over time we want to be every user’s personal travel guide, whether someone is looking for a place to stay, a place to eat, or something to do while on their trip.”
So far what they’re doing seems to be working. Just look at this chart below showing how TRIP stock is growing sales and users:
Source: TripAdvisor releases
TripAdvisor possesses a number of characteristics I look for in a great investment:
Significant Competitive Advantages: TripAdvisor provides perhaps the most valuable commodity in this entire space: Information. No other entity possesses the same breadth of information that TripAdvisor offers in its reviews. Users can read and also contribute not only reviews, but photographs as well, making for an exceptional internet experience.
Large and Growing Market Opportunities: Online travel is a massive industry in the middle of a major disruption thanks to the internet. According to IDC, global online ad market will exceed $177 billion this year. Of the approximately $51 billion that will be spent in travel advertising in 2016, it’s estimated that only about a quarter of that will be spent in online advertising. TripAdvisor’s trailing-12-month revenues are $1.4 billion.
Financial Fortitude: With a net cash position of over $600 million and a business model that generates strong and consistent cash flows, TripAdvisor is in a position to play offense and invest aggressively in the business. A good example of this investment can be seen in R&D as a percentage of sales. In 2010 it was 9%; over the most recent twelve months that number has grown to 16.3% and one area where TRIP stock continues to invest heavily is mobile. Smart move, we like it.