Would you rather a 5x in 4 years (IRR 50%) or would you rather a 40% quick pop on a takeout (IRR 284% if in 3 months). We are not surprised the vast of majority of our peers choose the latter. Even though we have a robust pipeline and stand ready to reallocate capital, if needed, we’d always prefer a lower IRR with significantly higher absolute appreciation potential.
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While our Whole Foods Market (WFM) IRR looks terrific (325% vs 44% absolute return), we would have preferred the company to triple by 2020, as we expected in a base case. Similarly, although TripAdvisor is a potential take-out candidate, we would much prefer to own the company for the next decade. The decade-long performance of competitor and customer Priceline Group (PCLN) should make us all try and find the next >70x.
In an odd way, the lower TripAdvisor trades, the higher the chance we could see a buyout. The reason is simple: Liberty TripAdvisor (LTRPA), which holds a controlling stake in the company, has debt at the holding company, and its debt carries a margin call at certain levels.
Warren Buffett: If You Own A Good Business, Keep It
A few things that have happened in the past week have led us to believe that TripAdvisor got quite close to a sale. First of all, the exhausted share repurchase program was not renewed– a possible sign that the board had material non-public information that prevented a program renewal.
Second, Priceline, despite a very aggressive marketing push in the United States, has pulled back in spending on the TripAdvisor platform in June and July. Were the group trying to take the company over, this would be an obvious way to get investors to sell the stock and allow for a cheaper acquisition.
And third, Liberty TripAdvisor had very odd timing of its quarterly results call. It held its conference call before TripAdvisor itself had reported its own results. This allowed them to prevent any questions on TripAdvisor.
While some may love to see a buyout, we would not like that. And so, we are doing our part. Our 31-page research report (available free on our Public Research page) has been shortened and published by Barron’s. You can see the article here. Quite hilariously Bloomberg actually attributed yesterday’s +6% performance to our article… We’re not so sure. But if it had the effect that it makes a margin call, and therefore sale of the group less likely, we are quite happy.
More likely the move is attributed to analyst updating models in the wake of the second quarter results. We believe the second quarter report had some very important accelerations in two of the biggest potential business drivers for TripAdvisor, despite a Priceline–induced lowering of the hotel revenue guidance for the rest of the year.
Exhibit 1: Mobile Hotel Monetization Gap Narrowing
We discussed our thoughts on these key driver accelerations in a flash note, and have now posted it on our public research page if you care to read it. In short, mobile usage is accelerating, which in this case is a great thing because desktop online hotel shopping is a dead opportunity, Google has already captured nearly all of the economics.
Exhibit 2: Google’s Monopoly has Already Captured Nearly All of Desktop Profitability
While we would not like to see a near term sale, TripAdvisor does have a very asymmetric risk-reward, because the lower the stock goes, the more likely it will be sold to a competitor. Not only is Priceline eager to increase its traffic in the US, but all OTA competitors are highly motivated to not see TripAdvisor sold to Ctrip.com, or another Chinese media company.
The most attractive route for the company is to just execute on the very significant opportunity it has ahead of itself in tours, attractions, European restaurants, and capturing all of the mobile hotel shoppers that regularly rely on the advice found on its app and site. Most users visit TripAdvisor before Expedia or Priceline, and so with mobile growth accelerating, it’s time to fix the glitch. It’s also time to bring in a COO to help drive this execution – execution that could yet generate the >10X performance enjoyed by some lucky OTA investors over the last decade.