Trip Advisor and Liberty Trip Advisor by Bewoulf Capital

Trip Advisor is an online travel booking website that operates in the crowded and competitive online travel segment. It operates mainly through tripadvisor.com and its variants.

The market size for travel spending is about $1.3T annually and is growing. Close to 40% or $500B of this spend happens online through services provided by OTA’s like flight, hotel and car bookings.  Key players include Priceline.com, expedia.com and their affiliated websites and meta-search players like kayak.com, trivago.com etc.  The business models for OTA’s are pretty simple a. Attract users on the website b. Offer the best rates and get users to book the room / flight / car  c. Get a commission from the hotels and use a part of it to market the website and 4. Repeat cycle. OTA’s are a high growth, high margin, high ROIC businesses.

For example: Priceline with its flagship priceline.com and booking.com . Priceline has a market cap of $66B and a PE of 27 and is richly valued.

In Millions of USD 2015 2014 2013 2012 2012-2015 CAGR
Revenue 9,223.99 8,441.97 6,793.31 5,260.96 20.4%
Gross Profit 8,591.81 7,584.13 5,715.89 4,083.68 27.8%
Selling/General/Admin. Expenses, Total 5,060.41 4,303.00 3,185.50 2,188.75 31.9%
Net Income 2,551.36 2,421.75 1,892.66 1,419.57 21.3%
Net Income % 27.7% 28.7% 27.9% 27.0%
Total Equity 8,795.47 8,566.69 6,909.73 3,896.97 30.8%
Long Term Debt 6,158.44 3,824.20 1,750.58 936.65 86.2%
ROE % 29.0% 28.3% 27.4% 36.4%

Example two would be Expedia which primarily derives its revenue from the large US market. It mainly operates through hotels.com, Orbitz and expedia.com. Expedia is trading at 19 times earnings and TripAdvisor was a spin off from Expedia in 2011. Also, it has John Malone’s fingerprints all over it through its 18% stake that is being spun off through Liberty Expedia (a post for another day)

In Millions of USD 2015 2014 2013 2012 2012-2015 CAGR
Revenue 6,672.32 5,763.48 4,771.26 4,030.35 18.1%
Gross Profit 5,362.76 4,584.40 3,733.22 3,131.74 19.4%
Selling/General/Admin. Expenses, Total 3,955.00 3,233.70 2,573.22 2,066.39 23.9%
Net Income 764.47 398.1 232.85 280.17
Net Income % 11.5% 6.9% 4.9% 7.0%
Total Equity 4,864.39 1,784.27 2,145.46 2,280.26 28.4%
Total Long Term Debt 3,201.28 1,746.79 1,249.41 1,249.35 36.4%
ROE % 15.7% 22.3% 10.9% 12.3%

What is Trip Advisor’s beef in this space?

Trip Advisor has an annual revenue of about $1.5B and is a growing business. TRIP has a rich base of user content and reviews that makes the site an ideal one-stop shop for travel planning. It currently has around 1.8M accommodations, 3.8M restaurants and 600K+ attractions that can be researched and planned on its website. It attracts over 350M unique visitors every month and has over 300M reviews on its sites. No other website can provide the breadth and depth of content and research that TRIP does today. This content is similar to how Amazon reviews drives traffic for Amazon. TRIP is also available in 46 languages making it accessible globally.  (All data are from its 2015 annual report)

When users research and plan trips through its website, one can search for hotels using Trip Advisor’s meta search and price compare with all other websites and book the best option available for the user. TRIP then takes a cut from the OTA (Priceline, Expedia) and the commissions thus derived are the major source of revenue today for TRIP.

In Millions of USD 2015 2014 2013 2012 2012-2015 CAGR
Revenue 1,492 1,246 945 763 24.8%
Gross Profit 1,434 1,206 927 751 23.8%
Selling/General/Admin. Expenses, Total 1,109 797 597 429 36.8%
Net Income 198 226 205 194 0.7%
Net Income % 13.3% 18.1% 21.7% 25.4%
Total Equity 1,412 1,125 865 727 24.5%
Total Long Term Debt 200 259 300 340 -16.1%
ROE % 14.0% 20.1% 23.7% 26.7%

TRIP through its huge user generated content has been attracting a lot of users and has been growing at a good clip. However, TRIP get a cut of the OTA’s commission that the hotels pay the OTA for directing traffic. So, TRIP is a marketing spend for OTA’s to attract  users.

Recently, TRIP has also been investing heavily in its business to enter the OTA business itself. Currently, one can book hotels directly on TRIP without having to leave its website. Over time, the company believes that it will reap rewards for this feature. However, in the short term, it has depressed margins. Furthermore, as seen through Priceline and Expedia, the margins in the OTA space are mouthwatering. If TripAdvisor is successful in entering the OTA space, its past growth and margins will not be a good indicator for the future. It must also be noted that PriceLine and Expedia are also getting into the content ranking space for hotels etc. in order to intensify competition with TRIP.

Today, TRIP can definitely be counted to create value to end users for their travel planning needs. The bigger question is can TRIP appropriate the value in the process? After researching, users are usually looking for the cheapest available room at a selected hotel. At the risk of being biased through personal experience and of those around me, today almost everyone uses TRIP for planning. However, when it comes to booking, there is almost always a cheaper option available (5-10%) than found on TRIP’s site or any of the other links that it provides. This is the significant difference between Amazon and TRIP. On Amazon, one is almost guaranteed to get the cheapest price for things. In the case of TRIP, there are significant discounts available today through mobile apps that take the price way below the advertised price on TRIP (mobile or website) with a very reasonable investment of a few minutes. How long will this continue is a question but it is possible that it is preventing TRIP from appropriating value from what it is creating.  It is creating a ceiling for the booking process than the floor and that is a significant problem that TRIP has to address quickly  if it needs to be competitive long term.

Valuation:

Currently TRIP is valued at $9B at a PE close to 47. However, this company has fingerprints of John Malone / George Maffei all over it with their 21% economic interest and 56% voting interest. Going by John Malone’s play book, free cash flow might be a better indicator of value for TRIP. TRIP generated around $873M of free cash flow in the last three years making its FCF yield at close to 3% of market cap per year. The Malone play book of levered buybacks, rising debt to be at an acceptable multiple of EBITDA, delaying the taxman’s liabilities are yet to play out at TRIP. Even with all the above unexplored levers and its foray into the OTA space, TRIP is richly valued today at 3% FCF yield and is not a slam dunk investment in our opinion.

Liberty Trip Advisor holdings (LTRPA/B) owns about ~31M shares in TRIP valued at $1.9B. The market cap of LTRPA is $1.6B at a 15% discount to TRIP. However, it is a holding company with the money losing buyseasons business. LTRPA is designed to be a tax free way for TRIP or other OTA’s to buy TRIP through LTRPA.

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