In November 2016 I went for a job with one of the top hedge funds in Australia. I was excited. I do not have the traditional analyst background and was coming from a distribution role so I thought this would be my breakthrough moment.
*cue 8 mile music* My palms were sweaty, my knees were weak and my arms were heavy. I hadn’t vomited on myself thankfully, I was nervous but on the surface I did try and look calm and ready.
I had a long discussion with the recruiter prior to first contact. They had worked for this hedge fund for a long time and knew how to drill me on my investments. They liked me and decided to put me forward. After that there was an interview with the head analyst of the team and then with the CIO. All went well and I was very excited as I got called back to the final round. This was a case study, they gave me a name – TripAdvisor Inc (NASDAQ:TRIP) – and I had a few weeks to research whether to recommend going long, going short or to do nothing.
After the few weeks, I submitted my note suggesting doing nothing. I felt TripAdvisor (NASDAQ: TRIP) was priced (at the time at $50 a share) for a lot more than perfection. I felt my analysis was deep and insightful but my writing, admittedly wasn’t the best. I had been told “write the note as if the person knows absolutely nothing about them” (Head Analyst) and I was also told “write it as if you are the business owner” (ex-partner in the hedge fund). I was indecisive and the writing was mixed.
The long and the short (<- see what i did there) of it is that I didn’t get the job. There was no follow up discussion of my work which was frustrating and the only feedback I had was from the recruiter on the phone who said that the team felt I hadn’t dealt with a potential acquisition in sufficient detail. The recruiter said not to feel bad, less than 0.5% of applicants get that far. I felt bad anyway, so put that in your pipe and smoke it.
In my (ultra biased) self-defence, I did address a potential acquisition and frankly thought an investment on this factor alone was a speculative hope given the competitive landscape and the price of the stock compared to its intrinsic value.
A few weeks later I was contacted by another big hedge fund in Australia whom I had been pestering. One of their PM’s basically said “listen you keep annoying us so I’ll give you 3 days to send us a long or short you have and we’ll see what happens from there”. I was snookered because I hadn’t time to put something fresh together as I was travelling with work and barely free from morning to night so I sent them my TripAdvisor note and called it a short. I said I was expecting a 50% fall within 18 months under the justification that it was grossly overpriced so a correction wasn’t out of the question.
I didn’t get that job either and one of their reasons was I would be foolish to bet against a stock which was at its lowest price in years. I didn’t find solace in that feedback to be honest as I thought it was a bit weak as analysis goes. Interestingly, within 6 months, the price fell by 40%.
Anyhoo, I have updated my thinking on TripAdvisor (NASDAQ:TRIP) below. From what I can see there are a few bulls in this – the top holders table on the TripAdvisor website gives you a list of the major names invested but also Greenwood Investors and Motley Fool are quite bullish and public with their thinking. I haven’t found any bears but then who would be foolish enough to bet against John Malone right??!
So if you’re reading this and think that I don’t know what I’m talking about, well, you have a lot of support from professional practitioners globally but….not from the last two years of price action (I’m sure they bought the dips…….). Ultimately, I would have avoided this stock myself when I was asked to make a recommendation in December 2016 but the insights I gained may help others who are reviewing it.
Trip Advisor (NASDAQ:TRIP) Advisor – the business model
TripAdvisor has a huge bank of user generated reviews across hotels, restaurants and tours mainly and very high web traffic. There are 48 TripAdvisor branded regional sites and 20 non-branded sites such as cruisecritic.com. When a visitor to a TripAdvisor website books one of these experiences (e.g. a hotel stay) via TripAdvisor then it gets paid by the experience provider (e.g. Hilton hotels pays TripAdvisor for the sales lead). Similarly, if it is booked with another online travel agency (‘OTA’) such as Expedia Group Inc (NASDAQ:EXPE) then they pay TripAdvisor in the same way. These two channels make up c.60% of the income of TripAdvisor. Revenues are also generated through advertising on the websites and accounts for 20% of revenues. The remaining 20% is Non-hotel revenues generated from bookings made with tours and experiences.
In the main revenue channel, the split is not clear between direct providers (this is called instant booking) and other OTA’s (called metasearch) but historically OTA’s have made up the bulk of TripAdvisor revenues. In the accounts, they have split revenue by ‘hotel’ (77%) and ‘non-hotel’ (23%) and then within ‘Hotel’ they break it down by “Trip Advisor-branded click-based and transaction”, “Trip AdvisorAdvisor-branded display-based advertising and subscription” and “Other hotel revenue”. Not exactly user friendly.
Hotel revenue has historically done the heavy lifting for TripAdvisor and at the end of December 2017 it made up 77% of revenues and 86% of EBITDA. But, it is struggling as can be seen from the below:
TRIP ADVISOR (NASDAQ: TRIP) Revenues 2012 – 2017
The Non-Hotel segment of tours and attractions has been picking up the slack which has been keeping the analysts happy that everything is moving along sweetly but it is not, there are issues. The stagnation in Hotel, and therefore TripAdvisor, revenues coincides with the entrance of ever more OTA’s and providers to the market, most notably, Alphabet Inc (NASDAQ:GOOGL), Skyscanner (NASDAQ:CTRP), AirBnb and Facebook Inc (NASDAQ:FB). The factors generally noted by TripAdvisor for the decline in Hotel revenues are
– reduction in their marketing spend, and
– declining revenue per shopper
They have noted however, that according to their internal logs visitor numbers have increased. They say they are up 7.5% in 2017 to 1.768bn unique annual visitors. That’s a lot of unique visitors considering it is estimated 3billion people use the internet.
The bull argument on TripAdvisor primarily centersaround increasing revenue per shopper from the current 43c per shopper to much higher levels. Any material rise in this will catapult the stock price given the amount of shoppers (1.77bn) involved. A very fair point.
Expedia (NASDAQ:EXPE) delivers $14 per unique shopper. Booking Holdings Inc (NASDAQ:BKNG) is hard to verify but it seems to be around $33 per unique shopper so if TripAdvisorcould deliver anything close to those figures it would be huge returns, 30x to 60x current revenues.
It’s a lovely thought but revenue in this area has stagnated and declined throughout TripAdvisor’s attempts to close that gap. Revenue in Expedia and Booking Holdings Inc (NASDAQ:BKNG) is growing but their marketing spends are also rising in line with it, almost one for one. The marginal gain of a new dollar spent on marketing for them is currently flat or negative for the bottom line. I believe this is due to the increased competition levels as the market is saturating. TripAdvisor has been taking a more calculated and tactical approach to its marketing spend which was down 10% yoy. This is more efficient profit but they are losing further market share as a result and the size of their marketing spend is dwarfed by the size and spend of Booking and Expedia. TripAdvisor spend about a sixth of Expedia and Booking Holdings, and these websites get a large portion of their users direct. It is also worth noting that a large portion of each OTA’s advertising spend is for online presence which is paid to Alphabet Inc (NASDAQ: GOOGL), who are now competing in the space. One could imagine then that the marginal gain on each dollar of marketing spend is going to reduce further. Google being a competitor now will make life more difficult for incumbents by putting their OTA infrastructure directly in the search results of other OTA’s, per below:
Picture 1: Recent screenshot of search for hotel in London
If you are a customer who is looking for hotels in London, why would you bother clicking the ads when on the search page Google gives you date options, pictures, reviews, locations and prices. Some people will look into multiple providers to compare the prices but if, after two or three times of realising the Google prices are as competitive as the paid ad entities then users will not bother going to that effort to compare them. A key element for Google here is if the profits from the endeavour are greater than those from the ads. This will only be clear in time.
The “Gig” economy is also a threat. Airbnb has risen in popularity of course. But there are other effects. As people work more for themselves and corporates are less willing to spend on a more transient workforce then hotels are used less. Gig people are more used to Airbnb and Couchsurf than hotels and they are unwilling to spend their own money this way.
Does this theory stand up to reality? The below chart is a Google trends search for the websites TripAdvisor (NASDAQ: TRIP), Expedia Group Inc (NASDAQ: EXPE), Booking Holdings Inc (NASDAQ: BKNG) and Airbnb and it is clear that the rise of Airbnb is real and that it now surpasses the others in terms of people searching for it.
As we can see over the last five years searches for TripAdvisor have declined considerably, Expedia has declined but not as much. Booking has always been low, possibly because people remember the name more as the website address too and so don’t need to search. This is in line with what they say happens. Airbnb has gone from nearly bottom of the search interest to the top of the heap over five years. The current generation of customers are already off searching for hotels and on to searching for Airbnbs which has happened in the last few years. Airbnb is searched 3 times more than Trip Advisor on Google.
Trip Advisor’s revenues are stagnating/declining in Hotels and the future looks like it is getting tougher and tougher for that offering. Without the financial clout of their competitors for marketing or the brand space in people’s minds, it looks like they could be spent and/or searched off of the field of play.
In the non-hotel segment however Trip Advisor has built a good business with little competition at present. This channel has great potential. It is still too small to meet the valuation levels of the firm as a whole but it is a definite area of strength for the business.
Revenues have been discussed above but the table below highlights the growth rates yoy:
TRIP ADVISOR (NASDAQ: TRIP) Revenue growth rates 2012 – 2017
These growth rates start out very attractively but fizzle out pretty quick. The Hotels channel makes up the majority of revenues each year but its growth rates are less than the non-hotel channel every year from 2013-2017. This highlights the shift in where the growth is coming from.
Outside of revenues they have healthy cash balances, $673m and they maintain a good balance sheet overall. There is, however, scope for them to overrun themselves due to an unused revolving credit facility, particularly given their history of acquisitions.
The book value of the firm is $1.3billion but this includes $760million of goodwill which is the result of its acquisition history. This primarily reflects the amount of premium Trip Advisor (NASDAQ: TRIP) has paid on its historic acquisitions. They use market valuation to decide on whether this goodwill should be written down so the size of this item is connected to the misvaluation in price. I would not rely on it as a component of business value in the context of it generating cash or value so I would discount it from the book valuation. This gets us to about $440m of assets if it were to be sold tomorrow. There is $237m of debt captured within that figure but worryingly there is a further $1bn available to them on a revolving credit facility at any time they choose to spend it in the near future. The use of more than $440million of that would put the balance sheet in the red.
I have heard arguments that this is not how I should be valuing this stock given it is a “growth/tech” stock but I lean the other way. I think it is pertinent because there is a facility there that could eat into the available financial cushion at the picking up of a phone. Also, Trip Advisor (NASDAQ: TRIP) is nearly 20 years old, growth has slowed and its tech is easily matched at this point so I don’t agree with the evaluation that this is not a pertinent valuation approach and I disagree that it should be considered ala Facebook Inc (NASDAQ: FB), Netflix, Inc. (NASDAQ: NFLX) etc.
The stock price. One of the reasons I didn’t get one of the hedge fund jobs was that I shouldn’t have bet against a stock that was at its lowest level in years. I kind of went “huh?” “wha?” I said okay, thanks for your time and all the best with your search. And then the stock dropped a further 40%. It’s now risen back up to where it was in December 2016 so it’s worth noting that it moves around. In mid-May this year, over one day, it jumped 25% due to an earnings beat, in non-hotel revenues.
To me this clearly highlights that there still exists a place in the market for dreamers and the irrational and Trip Advisor (NASDAQ: TRIP) has what they are after. To me you’ve got a stock whose assets could be sold tomorrow for $440m assuming no discounts or wind up costs. They make somewhere in the region of $200m a year which isn’t really growing. So, at a market capitalisation of $6.5bn either you’re going to have to wait roughly 30 years, ignore inflation, to get your money back or, if you said, the last few years were negative anomalies and Trip Advisor’s profits will grow at 30% into perpetuity then it would still take you 9 years to get your money back. The former is unappealing to me and the latter seems unrealistic given there is no obvious source for growth and margin of that level with current information. The fair price to me for Trip Advisor seems closer to $2bn based on recent performance history but given the shifting landscape of the industry I don’t think that figure will hold well either.
Primary Ownership – In 2012 Liberty Interactive Corp (‘Liberty’) purchased a voting majority of shares. Liberty is famous for balance sheet management, tax engineering and deal making and has subsequently spun its TripAdvisor Inc (NASDAQ:TRIP) shares into a separate holding entity and indicated the aim to line up a purchaser. They are unlikely to allow the costs to runaway such as through marketing spend. Liberty are lining Trip Advisor up for a sale but it is hard to see how attractive this would be to potential purchasers at current valuation levels with the industry tightening. To Expedia or Booking it would not necessarily add much to their current flows. They are both also large parts of Trip Advisor’s revenues so they already benefit greatly from Trip Advisor but without the hassle and cost of an acquisition.
It could potentially be a strategy to hoover up market share in the face of increasing competition in the industry but it would only add an additional 15% to 20% to their top lines. Potentially a smaller competitor with delusions of grandeur, too much money (or access to money) and an inability to see the issues ahead, would be a buyer also, it can’t be ruled out but an investment in the hope of an acquisition is not a sound risk aware strategy. Also the non-Liberty shares are unlikely to enjoy much upside given it would be Liberty selling the company via the voting power. Any premium paid or upshot in the share price would not be enough to compensate for the risk here.
Institutional Owners – We need to look at the marginal investors and consider what it might look like if they behaved in concert. We need to know how many investors as a percentage of the whole are capable of realistically changing their minds and selling down.
We can see a table of the main holders of Trip Advisor’s shares on their website which highlights the largest holders.
As a quick aside, the below table highlights the style of managers invested in TripAdvisor Inc (NASDAQ:TRIP):
Source: Trip Advisor Website 17th December 2018
How ridiculous is the investing world that all of these types of investors can claim that Trip Advisor meets their “style”. Aggressive growth?Deep value? VC/Private Equity and Income! (Trip Advisor has not distributed dividends ever). Marketing in all its wonder.
Anyway, coming back to the analysis, looking at the list of individual holders of Trip Advisor below:
Source: Trip Advisor Website
We can see a lot of investment managers and hedge funds. Vanguard, most of the Blackrockholding and SSGA, I would imagine, are the passive holdings. As a result, we can assume that there is not likely to be a sea change of sentiment from these holders. Along with Liberty, they add up to just over 30% of the shares of Trip Advisor. The majority of the rest is held by asset managers, hedge funds and investment banks and are likely to be balancing on their bull case which is discussed throughout this note or which is driven by analyst sentiment.
Sentiment appears in the nearer term (courtesy of yahoo finance) to be between hold and sell, albeit, with the price estimates considerably upwards of a few months ago (no comment on the rational consistency of analysts, I am trying to find a job at the moment).
There are enough holders who are not necessarily long term institutional holdings or passive investors that a sudden change in sentiment could really move the stock price.
Trip Advisor was about at the $49/50 mark when I made my call to leave it be in December 2016. Today it is $57 and in that time it has done a round trip as low as $29 (-40% return) and back up to $64 and now it has come down again to $57. The takeaway to me from this is that it can and has gone down, a lot, based on very little relatively different information to where we are today. It has also jumped nearly 60% (April-May 2018) on an earnings beat. It is very sensitive to results changes and if anything, the landscape is tougher now for OTAs than ever. So, if we are on the north side of the fair valuation then any negative sentiment will swing it south again.
Large Customers/Partners – It is also worth noting that Expedia and Booking Holdings makeup over 40% of Trip Advisor’s revenues whereas Trip Advisor accounts for, at most, between just 2% and 5% of Expedia and Booking Holdings’ revenues respectively. These two are far more important to Trip Advisor than it is to them. What could this mean? It’s unclear and the likelihood is everyone is happy with the status quo but with competition increasing, times getting tougher and the landscape shifting it could be a recipe for a merger, an acquisition or aggressive competitive behaviours. Whatever the situation is, Trip Advisor is in a weak position. The auction system used by providers to bid on Trip Advisor space protects Trip Advisor to some degree. Trip Advisor auctionsits traffic to the highest bidder. If either Expedia or Booking pulled out of the process then it would effectively hand over that market share to the other player so that dynamic maintains competition in the auction for Trip Advisor which is a comfort as it keeps the process clean.
Strategy Going Forward
A couple of years ago part of the strategy for Trip Advisor was to expand ‘Instant Booking’ focus on Hotels and focus on the US and UK for this. For Instant Booking this was where they opened a channel for visitors to their sites to book direct with suppliers. This has been dialled back recently though as it did not convert into revenue gains. I believe the approach was flawed because when I reviewed it, Trip Advisor was displaying its offering but at the same time it also maintained the other OTA prices alongside it so a shopper knew immediately who the lowest offer was and it was not always Trip Advisor. By showing the other providers’ prices alongside their own they, at best, reminded shoppers to look elsewhere and at worst they showed them that there was in fact a better price elsewhere. This was a flawed strategy but I could see the logic as they could not remove the metasearch element as that would have killed those revenues. They needed to go the whole way though and remove the comparators to truly see the effect of ‘Instant Booking’. This could have been done in a controlled way by using regional sub-sites.
Metasearch is now here to stay as the dream of replacing it with Instant Booking didn’t work out. They do not provide the breakdown of the two in their revenue generation. Trip Advisor’s strategy is to raise the revenue per shopper metric with their largest region being the US. They are also focused on improving customer and travel partner experiences and building out mobile capability which is a growing area but delivers less revenue per shopper. The strategy is a bit, all of everything, the Non-Hotels area has been growing fastest in the last number of years and should be a focus. Their purchase of Bokun is a nod to this but they need to say it out loud that it is a key focus. OTA’s are a growing business in Asia but there is insufficient breakdown from the Trip Advisor accounts to understand how this is growing.
Below is the breakdown of industry regional OTA sales from 2014 to 2020 including estimates as taken from Statista
Industry and Competitors
The OTA Hotels industry is getting squeezed by slowing demand as the market matures and also shifts to gig options such as AirBnb, Couchsurf etc. This is particularly true in the US where the market is more mature. The squeeze is also being driven by increasing supply side entrants such as Alphabet Inc (NASDAQ:GOOGL), Facebook Inc. (NASDAQ: FB), Skyscanner, AirBnb etc.
The consequences of this squeeze can be seen in industry margin levels which have been tightening, marketing spends which have been rising, the increasing amount of competitors entering the market and the decline in the value of CPC auction contracts. No player has a competitive edge really, there is no moat available so it is a race to the bottom as the relatively low barriers to entry increase competition which can only compete by giving away margin. None of the players have a cost advantage or ability to gain custom with less hurdles than the others.
Trip Advisor (NASDAQ:TRIP) describe their 600m reviews and opinions as a strength but all the websites have thousands of reviews and generally people are only interested in the more recent reviews to get an idea of what they are booking. Having one million reviews on a hotel is as good as having a few hundred. No moat exists in this space and those with the infrastructure find they can build in the functionality relatively easily e.g. Google, Facebook and Skyscanner being more recent examples where they have ported existing infrastructure to the purpose of being an OTA.
The Bull Case
The bulls in this stock see major potential returns if the revenue per shopper metric rises from its current level of 43c to be closer to its competitors, Expedia Group Inc (NASDAQ:EXPE) and Booking Holdings Inc (NASDAQ:BKNG).Trip Advisor has the greatest number of unique visitors so if this could be done then it would be substantial. With 1.7 billion annual unique visitors, any increase in revenue per shopper will begin to add value quickly onto the relatively fixed cost base. Some also believe that Trip Advisor is more akin to a tech stock and so growth is going to be extensive, in line with that expected of Facebook Inc (NASDAQ: FB), Netflix, Inc. (NASDAQ: NFLX) etc. Those levels have not materialised, certainly not in the more recent history.
You can find bullish articles from Greenwood Investors or Motley fool for reference.
My Bear Case
I think I am one of the few. I am not saying there are structural issues here that a short is recommended but I believe that the valuation is too optimistic for what is happening with the stock. I think it is a well run and sound business but I think it faces serious head winds around competition, branding and competitive position in its core markets which will see it fall short of the great expectations built into the stock price. Its fringe markets are growing strongly but that is not currently a focus of the team and these markets are too small at the moment to be considered as a potential channel to meet the current valuation.
For revenue per shopper, I think part of the issue with Trip Advisor is that they offer metasearch whereas their main competitors don’t. They tried to address this with instant booking but they kept the comparators on the site beside their own offering. They also face the issue of not being considered the dedicated booking site. Booking Holdings Inc. (NASDAQ: BKNG) and Expedia Group Inc (NASDAQ: EXPE) have this branding and are go to sites for consumers. Booking Holdings highlight how they get a large bulk of their traffic directly which is a huge saving on marketing spend. Anecdotally, I asked my wife about her use of Trip Advisor and she said it’s her first port of call before making any booking. Then I asked her if she books there and she said “oh no”, she would never do that. That’s the problem they face.
I think it would require taking the risk of abandoning metasearch, in a controlled way, in chosen regions at first and just running instant booking alone and capturing visitors as they are on the site. That could kill the majority of their current revenue in the region they choose as a control site but if it took off then it would be far more profitable. They also have an Airbnb like service from their purchase of HouseTrip in 2016 but this is not mentioned much in their communications and could be an area for development given the rise of AirBnb.
Ultimately, I think the current valuation has a growth expectation built into it that is much greater than they have experienced or will experience. It is pricing in a large uptick in revenue per shopper which has in fact, been declining. I don’t know what is needed to change visitor habits on booking through TripAdvisor but I do know that continuing on as they have done will not close the gap between their current performance and the market expectations. They may be acquired but I see little attraction in this route for any of the potential buyers and it would yield little upside for shareholders with a lot of risk attached. I expect that on the current path, regardless of how much effort they throw at it, they will likely see their core business retract at the expense of growing their strength areas.
I have no position in Trip Advisor (NASDAQ: TRIP) and will not be taking a position in the next 72 hours. I would also note that I have failed to get two hedge fund analyst jobs as a result of my views on this stock. The search continues. This article was originally published at https://bryansinvestmentblog.wordpress.com/