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.
What’s TRIP Stock Worth?
To be sure, 2016 was not a kind year for TripAdvisor shareholders; the stock got pummeled and I’m not going to sit here and make the argument that the market is wrong and it just doesn’t understand the business. But I do think that this is an excellent business that made a big strategic push to take its Instant Booking platform global, which (temporarily) killed the double-digit revenue growth investors have gotten used to with this company.
Now that Instant Booking is fully rolled out, TRIP stock management has clearly stated that the focus for 2017 will center on re-accelerating that top-line growth … and I think that should re-accelerate investors’ interest in the stock.
Looking further out, as top-line growth reaccelerates, management will gradually be able to start pulling back on expenses involved with growing the awareness and reach of Instant Booking and thus mobile monetization will continue to improve. By 2021 (assuming management executes) I see an opportunity for TRIP stock to bring in $600 million or more in operating profit, resulting in a share price closer to $90 or better.
Things I’ll Be Watching
Perhaps the biggest risk TripAdvisor faces today is in regard to its relationships with Priceline Group Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE). Right now, those two advertising partners make up about 46% of TripAdvisor’s total revenue. This was part of the impetus in TripAdvisor building out its Instant Booking platform; to “plug the monetization leak” as management has put it and evolve as a location where travelers can now actually book reservations in their hunt to learn more about them.
And let’s not forget why people are going to TripAdvisor in the first place: the reviews. TRIP stock is dedicated to the integrity of its users’ reviews, using both manual and electronic systems to detect fraud.
I’ve posted a number of reviews to TripAdvisor and have to say it feels good knowing that they are vetted first before actually being published; that tells me they care deeply about the content going on the site, both positive and negative. But if the company lowers its guard — or even if enough people perceive that the reviews are no longer honest — it could degrade the massive network effects that power TripAdvisor’s business model.
The Bottom Line
Those who know how we invest here at The Motley Fool know we look for high-quality businesses and invest with a longer timeline than most. TripAdvisor is a business that I really like, and if management is able to re-accelerate revenue growth in in 2017 I think the stock is set up to have a great year.
More importantly though, I like it far beyond 2017. In fact TripAdvisor is a holding investors should plan on owning for the next three to five years, if not even longer.
Time is one of our greatest advantages as individual investors; let’s make sure to use it.
As of this writing, Jason Moser owned shares of TRIP.