Is Tripadvisor a Good Stock to Buy?

Since its spinout from Expedia Inc (NASDAQ:EXPE) and becoming a public company in December 2011, Tripadvisor Inc (NASDAQ:TRIP) is up 22%, about even with the NASDAQ. The company allows its users to access a database of reviews of primarily hospitality providers- hotels, inns, and bed and breakfasts-as well as restaurants and other service providers. Needham recently initiated coverage on the stock, naming it a buy.

In the second quarter of 2012, Tripadvisor’s revenue was up nicely from the same period a year earlier, showing a 16% gain. However, costs were considerably higher, notably administrative costs and in particular a large increase in stock-based compensation. Net income declined as a result. To some degree this is to be expected as the independent company now has to pay costs that were previously covered by the larger Expedia organization, and so cost growth over the next year should not be as high. However, even after stripping out increases in stock-based compensation selling and marketing costs grew faster than revenue. In addition, cash flow from operations was down.

Andreas Halvorsen

Tripadvisor Inc now trades at 26 times trailing earnings. Wall Street analysts think that the company is going to grow to the point where the current market cap of $4.8 billion represents a multiple of only 19 on earnings estimates for 2013. Our point of view is that its cost growth should slow, and that revenue is likely to continue growing, and so that margins could be on the way up.

There is a good deal of interest in Tripadvisor Inc from hedge funds, according to our database of 13F filings. Hedge funds like to invest in spinouts because management of the new company can concentrate on improving their core business rather than serving the interests of the larger organization. Learn more about spinouts and why they often make for good investments. Tiger Cubs in particular seem to like Tripadvisor, with three of the four largest positions in the stock being held by funds managed by former Tiger Management employees. Andreas Halvorsen’s Viking Global had the largest position, at the end of June, with 9 million shares (see more stocks owned by Viking Global).

The online travel industry as a whole is expected to achieve strong growth in the coming years, and so compared to many of its peers Tripadvisor is not particularly high priced. HomeAway, Inc. (NASDAQ:AWAY) is barely profitable on a trailing basis, and even looking forward to 2013 the vacation rental property website owner trades at 40 times expected earnings for that year. It grew its earnings substantially in its most recent quarter compared to a year earlier, but revenue growth of 22% was not much higher than Tripadvisor’s. We don’t think it is as good a value. Expedia and Priceline.com Inc (NASDAQ:PCLN) depend on bookings as opposed to reviews, but still make for good comps as they are also driven by travel trends. They are also larger businesses than Tripadvisor. Expedia and Priceline both trade at 17 times forward earnings estimates, however, which implies an actual discount relative to Tripadvisor’s forward P/E. With Priceline in particular showing very strong earnings growth recently- up 37% last quarter over a year ago- we think it may be the best buy in the industry, and like Tripadvisor Priceline counts many hedge funds among owners of its stock. Read about hedge fund investments in other travel companies.

Investors could also consider Yelp Inc (NYSE:YELP) as a peer as it too operates as a collection of reviews of local businesses. Yelp is looking at unprofitability this year, but analysts expect it to break into the black in 2013. It still trades at a very high forward P/E, but the theory is that earnings growth will continue and lead it to justify its $1.8 billion valuation- about 40% of Tripadvisor’s market cap, even though the latter company is clearly profitable already.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!