TRIP - Tripadvisor Inc.

[JBTC]

I normally hate to react to short-term price moves, but TRIP is up 10% in two sessions and the rumor is PCLN could potentially buy it.

 

Any thoughts?

 

[KCLarkin]

If I understand correctly, tripadvisor will potentially be in play starting aug 27th due to the liberty spinoff? Need two years post-spin for tax reasons?

 

Strategically, I would think this is almost a near certainty. I don't follow Malone closely, but I assume he spun this off with the goal of selling. PCLN signing up for Instant Book shows they see the strategic value.

 

I like this plenty standalone. But Trip + PCLN would be blockbuster. I assumed this was already priced in but perhaps not.

 

--

 

Do you have a source on those rumours?

[muscleman]

If I understand correctly, tripadvisor will potentially be in play starting aug 27th due to the liberty spinoff? Need two years post-spin for tax reasons?

 

Strategically, I would think this is almost a near certainty. I don't follow Malone closely, but I assume he spun this off with the goal of selling. PCLN signing up for Instant Book shows they see the strategic value.

 

I like this plenty standalone. But Trip + PCLN would be blockbuster. I assumed this was already priced in but perhaps not.

 

--

 

Do you have a source on those rumours?

 

It still depends on the price you pay, right? Without totally understanding the rational of these advertisement spendings, we could be potentially be overpaying.

[KCLarkin]

If I understand correctly, tripadvisor will potentially be in play starting aug 27th due to the liberty spinoff? Need two years post-spin for tax reasons?

 

Strategically, I would think this is almost a near certainty. I don't follow Malone closely, but I assume he spun this off with the goal of selling. PCLN signing up for Instant Book shows they see the strategic value.

 

I like this plenty standalone. But Trip + PCLN would be blockbuster. I assumed this was already priced in but perhaps not.

 

--

 

Do you have a source on those rumours?

 

It still depends on the price you pay, right? Without totally understanding the rational of these advertisement spendings, we could be potentially be overpaying.

 

Yes, I hesitated a bit on valuation. But it is hard to argue trip is worth much less than $10b. If this was an unprofitable unicorn, it would be valued much higher.

[JBTC]

If I understand correctly, tripadvisor will potentially be in play starting aug 27th due to the liberty spinoff? Need two years post-spin for tax reasons?

 

Strategically, I would think this is almost a near certainty. I don't follow Malone closely, but I assume he spun this off with the goal of selling. PCLN signing up for Instant Book shows they see the strategic value.

 

I like this plenty standalone. But Trip + PCLN would be blockbuster. I assumed this was already priced in but perhaps not.

 

--

 

Do you have a source on those rumours?

 

http://seekingalpha.com/news/3167131-tripadvisor-jumps-m-rumors

 

[ccplz]

I would take anything from SA with a grain of salt. I would not consider it a credible source.

[KCLarkin]

I saw an analyst commenting on the rumours. So the rumours are real.

 

But seems like bs to me. As mentioned, Liberty won't sell until at least August.

 

But I still think it will happen eventually, if it can get past anti-trust.

[muscleman]

https://www.similarweb.com/website/tripadvisor.com#social

 

I find this website fascinating.  :)

[muscleman]

LTRPA's consolidated balance sheet represents no reality. Where can I find unconsolidated balance sheet? Or do I have to look at TRIP's balance sheet and reverse engineer one out?

 

LTRPA's TRIP stocks are worth 2.5 bn on December 31 2015, which means 1.9 bn as of today. Margin loan is 431 million. So the value excluding Buy season is 1.5 bn.

 

The consolidated balance sheet is confusing to me. Goodwill is 3.6 bn in LTRPA, but only 0.7 million in TRIP's balance sheet. I thought LTRPA's treatment is to add everything TRIP has onto its balance sheet for consolidation, as LTRPA has 58% of voting power.

 

Can anyone help me understand the discrepancies?

[ccplz]

How much will revenue per user increase with the successful implementation of Instant Booking?

[JBTC]

How much will revenue per user increase with the successful implementation of Instant Booking?

 

My guess is 50%+.

 

Last year PCLN spent $3.4bn in ads and marketing, which generated $8.6bn in booking revenue. So $1 in ads/marketing can lead to $2.5 in booking.

 

Given the role of IB is only to facilitate the booking, TRIP surely won't capture the entire $2.5.

 

[JBTC]

https://www.similarweb.com/website/tripadvisor.com#social

 

I find this website fascinating.  :)

 

Fascinating indeed.

 

Just to bring back to the discussion on SEM earlier -

 

Given 99.5% of the searches leading to the TRIP site are organic, does this suggest that paid SEM is perhaps not necessary?

 

[KCLarkin]

Given 99.5% of the searches leading to the TRIP site are organic, does this suggest that paid SEM is perhaps not necessary?

 

I think we were on the wrong path with the SEM discussion.

 

TRIP should bid for traffic until LTV = CAC.

 

So if they are able to increase LTV through a combination of Instant Book, more repeat bookings, and extending the product line, they will be able to afford to bid higher for traffic. So, if they are successful, we should expect marketing costs to increase dramatically.

 

The concept of "margin" in this model is completely misleading. In other words, the leverage is on the revenue side not the cost side.

 

The advantage of TRIP is that CAC is much lower than PCLN and EXPE (due to compelling content and higher organic traffic). The disadvantage is that revenue per shopper is much lower (because they are higher in the funnel).

 

Notes:

LTV - Lifetime Value (net present value of a newly acquired customer)

CAC - Customer Acquisition Cost

 

[ccplz]

TRIP should bid for traffic until LTV = CAC.

 

Why?

[JBTC]

Given 99.5% of the searches leading to the TRIP site are organic, does this suggest that paid SEM is perhaps not necessary?

 

I think we were on the wrong path with the SEM discussion.

 

TRIP should bid for traffic until LTV = CAC.

 

So if they are able to increase LTV through a combination of Instant Book, more repeat bookings, and extending the product line, they will be able to afford to bid higher for traffic. So, if they are successful, we should expect marketing costs to increase dramatically.

 

The concept of "margin" in this model is completely misleading. In other words, the leverage is on the revenue side not the cost side.

 

The advantage of TRIP is that CAC is much lower than PCLN and EXPE (due to compelling content and higher organic traffic). The disadvantage is that revenue per shopper is much lower (because they are higher in the funnel).

 

Notes:

LTV - Lifetime Value (net present value of a newly acquired customer)

CAC - Customer Acquisition Cost

 

I can see where you are going with this, but LTV is probably tough to measure in this case.

 

[KCLarkin]

TRIP should bid for traffic until LTV = CAC.

 

Why?

 

Assuming you have selected an appropriate discount rate, this is equivalent to saying you should invest as long as NPV > 0. If you acquire a customer that is worth $1 for $0.99, you have increased the value of your company by $0.01.

 

That's the economic theory. There are practical reasons why you might not do this. For example, CAC is expensed immediately. So it will burden earnings immediately but the benefits are earned over time. So you might not make the investment, even though it is economically rational. You will also want a margin of safety. So you might decide to only buy $1 customers if you can get them for $0.75.

 

But the concept is sound. If they can increase the LTV to $2, they can bid up to $1.50 instead of $0.75. Marketing costs will go up. Marketing costs as a percentage of revenue might go up too, since you are acquiring a larger portion of your customers via SEM rather than organically.

 

Note: LTV = CAC is the marginal bid. The above assumes that they can get their current traffic at their current CAC. Only the incremental traffic is purchased at progressively higher bids. So you might have:

- 80% is organic

- 10% purchased at $0.75

- 7% purchased at $1

- 2% purchased at $1.25

- 1% purchased at $1.50

 

Before:

LTV = $1

Max bid = $0.75

CAC = $7.50 (80*$0 + 10*0.75)

Customers acquired = 90

LTV = $90 (90*$1)

---

NPV = $82.50

 

After:

LTV = $2

Max bid = $1.5

CAC= $18.50

Customers acquired = 100

LTV = $200 (100*$2)

---

NPV = $181.5

 

Your NPV increases 220%. Your ad budget increases 247%.

 

Of course, this is only a model. Reality is much more complicated. But I don't think it is correct to assume that marketing costs will go down if Instant Book is successful in increasing LTV.

 

[KCLarkin]

I can see where you are going with this, but LTV is probably tough to measure in this case.

 

TRIP is a bit harder than pure OTAs since it is higher in the funnel. But you would be surprised how accurately this can be measured using funnel analysis, cohort analysis and other tools.

 

But anyway, my comment wasn't meant to be precise. Rather, it is a directional comment: I expect marketing costs to increase if IB is successful.

 

Earlier in the thread, someone mentioned that PCLN marketing as a % of revenue is increasing. This would be consistent with my theory. The CAC for marginal traffic is higher. So the more revenue you acquire, the higher your marketing costs.

 

TRIP could cut marketing costs to nearly $0 and possibly maintain traffic. Marketing as a % of revenue would be 0%. But the NPV of TRIP would be greatly diminished (assuming they are getting good returns on their marketing).

[rishig]

I can see where you are going with this, but LTV is probably tough to measure in this case.

 

TRIP is a bit harder than pure OTAs since it is higher in the funnel. But you would be surprised how accurately this can be measured using funnel analysis, cohort analysis and other tools.

 

But anyway, my comment wasn't meant to be precise. Rather, it is a directional comment: I expect marketing costs to increase if IB is successful.

 

Earlier in the thread, someone mentioned that PCLN marketing as a % of revenue is increasing. This would be consistent with my theory. The CAC for marginal traffic is higher. So the more revenue you acquire, the higher your marketing costs.

 

TRIP could cut marketing costs to nearly $0 and possibly maintain traffic. Marketing as a % of revenue would be 0%. But the NPV of TRIP would be greatly diminished (assuming they are getting good returns on their marketing).

 

Running a hotel booking platform is a two sided market. You need hotels and hotel customers. What you saying is that I can cut marketing costs to $0 and have the platform build network effects on its own i.e. both hotels and hotel customers will flock to the platform on its own. I don't think is true. PCLN has marketing people all over the world building relationships with hotels to get them to come to the platform. There is a reason why TRIP decided to partner with PCLN to build the international business. Also, saying that I can cut SEM budget to zero is making a statement that search engines don't matter at all. I don't agree with this as well. Search engines are being optimized for mobile experiences where Geo information is an important signal.

[KCLarkin]

I can see where you are going with this, but LTV is probably tough to measure in this case.

 

TRIP is a bit harder than pure OTAs since it is higher in the funnel. But you would be surprised how accurately this can be measured using funnel analysis, cohort analysis and other tools.

 

But anyway, my comment wasn't meant to be precise. Rather, it is a directional comment: I expect marketing costs to increase if IB is successful.

 

Earlier in the thread, someone mentioned that PCLN marketing as a % of revenue is increasing. This would be consistent with my theory. The CAC for marginal traffic is higher. So the more revenue you acquire, the higher your marketing costs.

 

TRIP could cut marketing costs to nearly $0 and possibly maintain traffic. Marketing as a % of revenue would be 0%. But the NPV of TRIP would be greatly diminished (assuming they are getting good returns on their marketing).

 

Running a hotel booking platform is a two sided market. You need hotels and hotel customers. What you saying is that I can cut marketing costs to $0 and have the platform build network effects on its own i.e. both hotels and hotel customers will flock to the platform on its own. I don't think is true. PCLN has marketing people all over the world building relationships with hotels to get them to come to the platform. There is a reason why TRIP decided to partner with PCLN to build the international business. Also, saying that I can cut SEM budget to zero is making a statement that search engines don't matter at all. I don't agree with this as well. Search engines are being optimized for mobile experiences where Geo information is an important signal.

 

Your comments seem tangential to what I am trying to say: marketing costs for TRIP should increase. There won't be any operating leverage (at least for marketing costs). If anything, there will be negative operating leverage.

 

To be precise, I am saying the importance of paid search increases dramatically if the LTV of a customer increases due to IB. My assumption is that TRIP can't outbid PCLN or EXPE for traffic. So even if they wanted to invest in SEM, they couldn't. This is typical for websites that are at the top of the funnel. It is very difficult for TRIP to buy traffic from Google and then re-sell it to PCLN at a profit.

 

But anyway:

Search engines do matter. The advantage that TRIP has is that it has very compelling content that does well organically in search. If you believe https://www.similarweb.com/website/tripadvisor.com#search then only 0.5% of TRIP search traffic comes from paid search. If IB is successful, then paid versus organic search traffic should converge towards booking.com (50%). If that happens, marketing costs would increase dramatically.

 

All those hotels with TripAdvisor stickers in their window are well aware of the importance of TripAdvisor. I haven't seen any booking.com stickers.

 

Plus, I think Priceline buys TripAdvisor. It just doesn't make sense for TRIP to try to rebuild that network. And even if PCLN doesn't buy them, why do they need to rebuild the network? They're already partners. Let Priceline provide the long tail. TRIP can focus on national chains for direct booking.

[JBTC]

I can see where you are going with this, but LTV is probably tough to measure in this case.

 

TRIP is a bit harder than pure OTAs since it is higher in the funnel. But you would be surprised how accurately this can be measured using funnel analysis, cohort analysis and other tools.

 

But anyway, my comment wasn't meant to be precise. Rather, it is a directional comment: I expect marketing costs to increase if IB is successful.

 

Earlier in the thread, someone mentioned that PCLN marketing as a % of revenue is increasing. This would be consistent with my theory. The CAC for marginal traffic is higher. So the more revenue you acquire, the higher your marketing costs.

 

TRIP could cut marketing costs to nearly $0 and possibly maintain traffic. Marketing as a % of revenue would be 0%. But the NPV of TRIP would be greatly diminished (assuming they are getting good returns on their marketing).

 

Running a hotel booking platform is a two sided market. You need hotels and hotel customers. What you saying is that I can cut marketing costs to $0 and have the platform build network effects on its own i.e. both hotels and hotel customers will flock to the platform on its own. I don't think is true. PCLN has marketing people all over the world building relationships with hotels to get them to come to the platform. There is a reason why TRIP decided to partner with PCLN to build the international business. Also, saying that I can cut SEM budget to zero is making a statement that search engines don't matter at all. I don't agree with this as well. Search engines are being optimized for mobile experiences where Geo information is an important signal.

 

rishig,

 

You seem to be familiar with PCLN. What's the moat of PCLN? What does it have that others don't? For me personally there is little difference between booking.com and hotels.com.

 

I suppose you'd say PCLN has links to the hotels. It may come down to which of the two sides matters more - the travelers or the hotels?

 

I am leaning towards the travelers being more important.

 

PCLN makes its living by providing two things to hotels - 1) customers, and 2) complete the transaction. I haven't thought this through, but my hunch is that the value of simply completing the transaction will diminish. So PCLN's value may ultimately reside in sourcing the customers. In this role, although it has been doing a good job and has its repeat customers, PCLN doesn't seem to have a moat. It completely depends on Google and TRIP.

 

Does this sound fair to you?

 

[KCLarkin]

JBTC, I think Priceline's moat is covered pretty well by Ross at the start of the PCLN thread:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pcln-priceline-group-inc/

 

Going through the PCLN thread now, and came across this good summary of PCLN from Rishig:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pcln-priceline-group-inc/msg206395/#msg206395

 

[JBTC]

JBTC, I think Priceline's moat is covered pretty well by Ross at the start of the PCLN thread:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pcln-priceline-group-inc/

 

Going through the PCLN thread now, and came across this good summary of PCLN from Rishig:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pcln-priceline-group-inc/msg206395/#msg206395

 

Thanks Larkin.

 

I saw those before. Just trying to think about the few things that really matter in the long-term.

 

I vaguely thought TRIP and PCLN could merge before. I know you believe that. I was hoping to understand if and how much PCLN might need TRIP. As being pointed out, PCLN's change of mind in IB does seem to indicate the necessity of a partnership.

 

If I was in PCLN's shoes, these are the threats I am facing.

 

1) Hotels are consolidating. The highly consolidated nature of the US hotel market already makes OTAs' life not as good as elsewhere. Of course the hotels are being forced to consolidate due in large part to OTAs and Google and TRIP. Given the hotel consolidation is an unmistakable trend everywhere, the larger PCLN gets the better.

 

2) Google is powerful. Without Google PCLN makes no living. While Google seems to be content to cooperate for now, PCLN's utter dependence on Google is a serious risk in the LT.

 

3) Google is determined to dominate even more in travel, with its recent launch of Destinations. It's increasingly a more direct attack on TRIP and other meta search engines. Think about it - everything a meta search engine can do, Google can do it. Google knows search, period. To the extent that Google can kill TRIP (it won't) and other meta search engines (it may), PCLN is rendered to an even weaker market position.

 

4) TRIP is not content with sending traffic to PCLN and getting paid peanuts. If IB is successful, it'd be a huge threat to PCLN's profitability.

 

Considering all the above, PCLN buying TRIP would seem both a defensive and offensive move. It will be stronger in customer sourcing and more important to hotels, TRIP's threat is gone (cannibalizing is better than being killed), its market position to Google is enhanced because TRIP does not need Google.

 

Why can TRIP survive the Google onslaught? Because it's both social and search. The search function has already been replicated, but the social part will thrive.

 

[KCLarkin]

After reading the PCLN thread, I am less convinced that Priceline will buy TRIP. The pricetag might be too high.

 

I don't think IB will ever really be a threat to PCLN. Conversion will always be a problem, which means TRIP won't be able to compete for paid search. But TRIP should be able to get a bigger slice of the revenue. Especially on mobile.

 

I'm still struggling with TRIP. It feels like a J-curve thesis but I can't quite bridge the gap between today's modest revenue per shopper and future prosperity. Mobile is probably the key.

 

Right now, it looks like you are paying full price for the current business with an option on a very prosperous future.

[scorpioncapital]

JBTC I agree, these companies are not as moaty or easy to predict their future as it seems. One thing PCLN has on top of the 2 you mentioned is money and a high stock price. That has some value I suppose to use this time of consolidation and change to try to do something different that puts more alligators in the moat. Not using this time wisely will have consequences but all this will play out in slow motion so there is no urgent need to make a decision one way or the other yet. Expedia recently bought HomeAway, this has some mild disruptive power as it sources properties from individuals instead of hotels and adds them to the listings. It's an interesting situation because I maintain it serves to compete directly with your own customers (the hotels). But perhaps tangentially if the locations are more country lodgings vs urban hotels. Still I was reading some Philip Fischer in Paths to Wealth and he maintains it doesn't usually end very well when you compete against your own customers but maybe that is what you have to do in a rapidly changing business.

 

[muscleman]

https://www.similarweb.com/website/tripadvisor.com#social

 

I find this website fascinating.  :)

 

Fascinating indeed.

 

Just to bring back to the discussion on SEM earlier -

 

Given 99.5% of the searches leading to the TRIP site are organic, does this suggest that paid SEM is perhaps not necessary?

 

I think you are looking at the wrong data.

68.97% Of traffic is from Search.

 

This means SEM spending is necessary at this moment.

If you look at google.com or facebook.com, and compare their Traffic Sources, you will see something drastically different.

When you have most traffic coming from Direct, you can safely cut SEM spending and be assured that traffic will not drop.