TRIP - Tripadvisor Inc.

[rishig]

What's TRIP's moat?

All its information is public. As a software engineer, I know I can build a new website and craw all of TRIP's user reviews onto my website for free. I think I can replicate TRIP with just a few million dollars.

 

Why has no one done it then? Raising a few million dollars on Silicon Valley is not that hard. Raise a few million and turn it into a $10B market cap company, that sounds like an opportunity of a life time.

 

[muscleman]

What's TRIP's moat?

All its information is public. As a software engineer, I know I can build a new website and craw all of TRIP's user reviews onto my website for free. I think I can replicate TRIP with just a few million dollars.

 

Why has no one done it then? Raising a few million dollars on Silicon Valley is not that hard. Raise a few million and turn it into a $10B market cap company, that sounds like an opportunity of a life time.

 

If a lawyer could tell me if the user posts on TRIP count as Intellectual property of TRIP? If not, then I don't see why TRIP can't be copied for a few million dollars. I can simply build a website and craw all of TRIP's reviews onto my website for a few million dollars, and then spend search engine money to attract traffic onto my website.

 

I don't see any technological problems for doing these. The only potential barrier is the legal barrier.

 

 

[rishig]

What's TRIP's moat?

All its information is public. As a software engineer, I know I can build a new website and craw all of TRIP's user reviews onto my website for free. I think I can replicate TRIP with just a few million dollars.

 

Why has no one done it then? Raising a few million dollars on Silicon Valley is not that hard. Raise a few million and turn it into a $10B market cap company, that sounds like an opportunity of a life time.

 

If a lawyer could tell me if the user posts on TRIP count as Intellectual property of TRIP? If not, then I don't see why TRIP can't be copied for a few million dollars. I can simply build a website and craw all of TRIP's reviews onto my website for a few million dollars, and then spend search engine money to attract traffic onto my website.

 

I don't see any technological problems for doing these. The only potential barrier is the legal barrier.

 

So that is a moat, right, unless you envision IP law to change? Also, say you get around the IP issue and have a website that looks identical to TripAdvisor, why does it mean anything? What really matters are the network effects (new users generating reviews and advertisers paying you money for clicks). Can you replicate the network effects? Can you fool the advertisers to spend the same kind of dollars on your website? How do you plan to monetize this replicated website? What is the point of this argument?

[cmlber]

What's TRIP's moat?

All its information is public. As a software engineer, I know I can build a new website and craw all of TRIP's user reviews onto my website for free. I think I can replicate TRIP with just a few million dollars.

 

Why has no one done it then? Raising a few million dollars on Silicon Valley is not that hard. Raise a few million and turn it into a $10B market cap company, that sounds like an opportunity of a life time.

 

If a lawyer could tell me if the user posts on TRIP count as Intellectual property of TRIP? If not, then I don't see why TRIP can't be copied for a few million dollars. I can simply build a website and craw all of TRIP's reviews onto my website for a few million dollars, and then spend search engine money to attract traffic onto my website.

 

I don't see any technological problems for doing these. The only potential barrier is the legal barrier.

 

Since everyone in silicon valley surely knows what you do about how easy it would be, technologically, to scrape TRIP for data and copy it, doesn't the fact that it hasn't been done indicate that there is a reason it can't be done?

 

Perhaps it's this from the terms of use on TRIPs website?

 

PROHIBITED ACTIVITIES

The content and information on this Website (including, but not limited to, messages, data, information, text, music, sound, photos, graphics, video, maps, icons, software, code or other material), as well as the infrastructure used to provide such content and information, is proprietary to us. You agree not to otherwise modify, copy, distribute, transmit, display, perform, reproduce, publish, license, create derivative works from, transfer, or sell or re-sell any information, software, products, or services obtained from or through this Website. Additionally, you agree not to:

 

(i) use this Website or its contents for any commercial purpose

(ii) access, monitor or copy any content or information of this Website using any robot, spider, scraper or other automated means or any manual process for any purpose without our express written permission;

(iii) violate the restrictions in any robot exclusion headers on this Website or bypass or circumvent other measures employed to prevent or limit access to this Website;

(iv) take any action that imposes, or may impose, in our discretion, an unreasonable or disproportionately large load on our infrastructure;

(v) deep-link to any portion of this Website for any purpose without our express written permission; or

(vi) "frame", "mirror" or otherwise incorporate any part of this Website into any other website without our prior written authorization.

(vii) attempt to modify, translate, adapt, edit, decompile, disassemble, or reverse engineer any software programs used by TripAdvisor in connection with the Website or the services.

[Picasso]

This thread is getting too meta for me. The cloner trying to clone TripAdvisor by stealing their IP.  Sounds like a great idea, let me know how it goes.

[JBTC]

What's TRIP's moat?

All its information is public. As a software engineer, I know I can build a new website and craw all of TRIP's user reviews onto my website for free. I think I can replicate TRIP with just a few million dollars.

 

Why has no one done it then? Raising a few million dollars on Silicon Valley is not that hard. Raise a few million and turn it into a $10B market cap company, that sounds like an opportunity of a life time.

 

If a lawyer could tell me if the user posts on TRIP count as Intellectual property of TRIP? If not, then I don't see why TRIP can't be copied for a few million dollars. I can simply build a website and craw all of TRIP's reviews onto my website for a few million dollars, and then spend search engine money to attract traffic onto my website.

 

I don't see any technological problems for doing these. The only potential barrier is the legal barrier.

 

I'd like to think that a legal barrier is certainly superior to a technological barrier.

 

A question perhaps more than interesting than "if I can steal its content" is Buffett's billion-dollar test -

 

If I give you a billion dollars and ask you to try to kill TRIP using only legal and moral methods, can you do it?

 

If the answer is no, then we are staring at a potentially very durable business.

 

[merkhet]

Aren't you guys overlooking the main barrier here?

 

If @MM got a hold of a few million dollars and crawled the site to copy the information/reviews, etc. and that was somehow legal (dubious), the more important question is:

 

Who would choose to go to MuscleTrips.com versus TripAdvisor.com?

 

How would you replace the thousands (millions?) of TripAdvisor stickers around the world that provide travelers with awareness of the TripAdvisor site and brand?

[rishig]

Aren't you guys overlooking the main barrier here?

 

If @MM got a hold of a few million dollars and crawled the site to copy the information/reviews, etc. and that was somehow legal (dubious), the more important question is:

 

Who would choose to go to MuscleTrips.com versus TripAdvisor.com?

 

How would you replace the thousands (millions?) of TripAdvisor stickers around the world that provide travelers with awareness of the TripAdvisor site and brand?

 

Yes, I mentioned this before. The primary moat is the network effects. Just because I have a replica website doesn't mean I can get 300M downloads or that I can get people to use it for making travel decisions or that I can get hotels / OTAs to pay me for advertising. I think we can safely leave this question to rest, in my opinion.

 

The "I can replicate" argument already exists in the Search Engine world. Bing is a second entrant to the search engine space. Unfortunately, it's market share is very tiny. The reason why - network effects of bringing users and advertisers on one platform.

[Sionnach]

Aren't you guys overlooking the main barrier here?

 

If @MM got a hold of a few million dollars and crawled the site to copy the information/reviews, etc. and that was somehow legal (dubious), the more important question is:

 

Who would choose to go to MuscleTrips.com versus TripAdvisor.com?

 

How would you replace the thousands (millions?) of TripAdvisor stickers around the world that provide travelers with awareness of the TripAdvisor site and brand?

 

This is exactly right - its the intangible assets of "mindshare" and "trust".

 

Even if MuscleTrips.com existed, people would say what the f*** is MuscleTrips.com? is it a cruise line for bodybuilders? are the reviews reliable? why does everyone on the site talk about protein shakes?

 

I would say its analogous to Jet.com vs. Amazon (or bing/google as mentioned). Jet replicated Amazon's lower prices, but couldn't get the mindshare and trust of consumers like Amazon had.

[glorysk87]

 

Great comments. A business model adjustment results in two things: a wobble in earnings and investor uncertainty. So you get multiple compression on top of depressed earnings. And if the transition works, you get revenue acceleration on the other side.

 

Obviously, you need to be selective. But off the top of my head, here are a few business model changes that worked:

Google - transition to mobile http://www.thestreet.com/story/11742377/1/googles-mobile-mess.html

Facebook - transition to mobile http://marketrealist.com/2014/01/facebook-ipo/

Cimpress (vistaprint) - moved up-market http://docslide.us/documents/2012-q3-letter-kcm.html

Adobe - transition to Cloud http://www.bloomberg.com/news/articles/2012-04-23/adobe-s-cloud-math-means-new-programs-will-sell-for-less

 

Eric Khrom described this as riding the "j-curve" (I assume he didn't invent the term but I've found it a useful investment framework).

 

On desktop, I somewhat agree. But on mobile, there is an enormous advantage to get your reviews and booking done in a single app.

 

Completely agree with you - model adjustment certainly provides a discount based on investor uncertainty. But in my experience, the discount is justified.  For example, for every Google or Facebook who successfully transitioned their business model, you have dozens of companies who fell apart during the transition.  One off the top of my head is RetailMeNot.  Transition to mobile went disastrously.

 

Which leads me to my next point - how many people are actually booking vacations on mobile devices? I've done a lot of research on consumer spending patterns on mobile vs. desktop, and the overwhelming evidence is that while people tend to do a lot of research on mobile, they very consistently switch to desktop to make the actual purchase.  This is where I fear TRIP loses the customer.  It's easy to do research and look up reviews on the TRIP mobile app. But if I'm spending a few thousand dollars for a vacation, I almost certainly will switch to my desktop to complete the purchase process and most likely will end up at another site to make the reservation/purchase.

 

Overall, I think TRIP has a very compelling business and an even more compelling competitive moat (it's the ONLY place to go to get TONS of anecdotal feedback on vacation spots).  But my main fear here is that they will be unable to monetize the model, or alternatively able to monetize but at a much lower frequency or dollar amount.

 

I'm just not sure how you can invest without knowing how the IB transition turns out.

[rishig]

 

Great comments. A business model adjustment results in two things: a wobble in earnings and investor uncertainty. So you get multiple compression on top of depressed earnings. And if the transition works, you get revenue acceleration on the other side.

 

Obviously, you need to be selective. But off the top of my head, here are a few business model changes that worked:

Google - transition to mobile http://www.thestreet.com/story/11742377/1/googles-mobile-mess.html

Facebook - transition to mobile http://marketrealist.com/2014/01/facebook-ipo/

Cimpress (vistaprint) - moved up-market http://docslide.us/documents/2012-q3-letter-kcm.html

Adobe - transition to Cloud http://www.bloomberg.com/news/articles/2012-04-23/adobe-s-cloud-math-means-new-programs-will-sell-for-less

 

Eric Khrom described this as riding the "j-curve" (I assume he didn't invent the term but I've found it a useful investment framework).

 

On desktop, I somewhat agree. But on mobile, there is an enormous advantage to get your reviews and booking done in a single app.

 

Which leads me to my next point - how many people are actually booking vacations on mobile devices? I've done a lot of research on consumer spending patterns on mobile vs. desktop, and the overwhelming evidence is that while people tend to do a lot of research on mobile, they very consistently switch to desktop to make the actual purchase.  This is where I fear TRIP loses the customer.  It's easy to do research and look up reviews on the TRIP mobile app. But if I'm spending a few thousand dollars for a vacation, I almost certainly will switch to my desktop to complete the purchase process and most likely will end up at another site to make the reservation/purchase.

 

The above point is the same thing I have heard from people I have talked to in SEM. The question I asked is why is Priceline Group (i.e. booking.com) spending huge dollars on SEM. The answer I got is what you stated above - booking a 3+ day trip is a large purchase and an important experience. Almost no one does it on a mobile phone.

[JBTC]

I love the TRIP business model. But I just don't understand how anyone could justify investing here in the midst of a business model evolution.  Instant Booking is, so far, kind of a question mark. And every time that I've invested in a company in the midst of a model transition, I've gotten burned.  To invest here you have to believe that Instant Booking will really gain traction as a mainstream way for travelers to book trips. I'm not sure I can wrap my head around that.  The tendency of a traveler is to look up reviews on TRIP, and then scour the internet to find the best price they can (usually falling back to their tried and true OTC that they trust).  There's nothing really motivating the customer to stay and thus to capture that sale on the Instant Booking platform.

 

You say you love the business model, but are not sure about IB and hence the business model evolution.

 

This is no reason in my view to fear TRIP's business transition, because while many model transitions are forced upon the companies (for example, newspapers have to go online as their readers stop buying physical papers), in TRIP's case the transition is entirely voluntary.

 

In fact TRIP has been making a great living by selling leads and ads to OTAs. COGS are mostly zero. If they want to reign in investments, TRIP may be one of the most profitable businesses on earth. My guess is even if they stop investing, online hotel shoppers will still rise and hence drive profits in coming years.

 

But TRIP wants to do better. They want to work harder. They have ambition. For anyone or any business, realizing their ambition is never a certain thing. If it does become certain IB will be widely adopted, TRIP will be back above $100 and possibly the OTAs may not trade as well.

 

It's of course possible IB may not succeed as well as TRIP hopes. In that case, the company will find out and go back to be a more dedicated advertising business. If there is no upside to revenue per shopper, I am quite sure management will be more judicious in making investments and will instead focus on improving margins.

 

[JBTC]

 

Great comments. A business model adjustment results in two things: a wobble in earnings and investor uncertainty. So you get multiple compression on top of depressed earnings. And if the transition works, you get revenue acceleration on the other side.

 

Obviously, you need to be selective. But off the top of my head, here are a few business model changes that worked:

Google - transition to mobile http://www.thestreet.com/story/11742377/1/googles-mobile-mess.html

Facebook - transition to mobile http://marketrealist.com/2014/01/facebook-ipo/

Cimpress (vistaprint) - moved up-market http://docslide.us/documents/2012-q3-letter-kcm.html

Adobe - transition to Cloud http://www.bloomberg.com/news/articles/2012-04-23/adobe-s-cloud-math-means-new-programs-will-sell-for-less

 

Eric Khrom described this as riding the "j-curve" (I assume he didn't invent the term but I've found it a useful investment framework).

 

On desktop, I somewhat agree. But on mobile, there is an enormous advantage to get your reviews and booking done in a single app.

 

Which leads me to my next point - how many people are actually booking vacations on mobile devices? I've done a lot of research on consumer spending patterns on mobile vs. desktop, and the overwhelming evidence is that while people tend to do a lot of research on mobile, they very consistently switch to desktop to make the actual purchase.  This is where I fear TRIP loses the customer.  It's easy to do research and look up reviews on the TRIP mobile app. But if I'm spending a few thousand dollars for a vacation, I almost certainly will switch to my desktop to complete the purchase process and most likely will end up at another site to make the reservation/purchase.

 

The above point is the same thing I have heard from people I have talked to in SEM. The question I asked is why is Priceline Group (i.e. booking.com) spending huge dollars on SEM. The answer I got is what you stated above - booking a 3+ day trip is a large purchase and an important experience. Almost no one does it on a mobile phone.

 

This is why TRIP said on the call -

 

"Looking at our longest standing cohort to U.S., instant booking is already more than 50% of revenues on our mobile app; that percentages much lower on other devices, but it speaks to the instant bookings potential to become a substantial part of our business over the next few years."

 

Plus, I book on my phone all the time (I am low-tech as I still use my iPhone 4). But I agree I don't count because I travel a lot.

 

[ZenaidaMacroura]

How many people are actually booking vacations on mobile devices? I've done a lot of research on consumer spending patterns on mobile vs. desktop, and the overwhelming evidence is that while people tend to do a lot of research on mobile, they very consistently switch to desktop to make the actual purchase.  This is where I fear TRIP loses the customer.  It's easy to do research and look up reviews on the TRIP mobile app. But if I'm spending a few thousand dollars for a vacation, I almost certainly will switch to my desktop to complete the purchase process and most likely will end up at another site to make the reservation/purchase.

 

 

In my mind this is comparable -but maybe it is not...

 

My GF has a character entertainment company (book a princess or superhero to come entertain for an hour at your kid's birthday party).  We get a lot of traffic through mobile -but almost all of the booking happens via the website.  I'm guessing when people see her promotional material or are present at an appearance they might look her up on their phone or tablet but they don't commit to book until they get in front of a desktop.  Not sure why... just comfort?  I

 

I've always wondered if this changes going forward?  I occionally hear (apocryphal?) stories of milleniuals who don't even own a desktop and do everything via mobile...

[kab60]

Personally, I prefer to book via desktop, but that's simply because it's a much faster way to type in the various forms when booking, and when I buy airline tickers it's easier for me to check if the information is correct on a big screen. BUT, if all my data was stored correctly on Trip I'd just do that instead and instant book. I travel every year where I go to a new Country for 2-4 weeks with nothing planned before I arrive, and while I don't bring a laptop I do bring a tablet/smartphone. Instant Booking would be awesome for that (I stay really budget, so I never use booking.com/hotels.com) but I suppose most people plan their trip from home.

[Ross812]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable.   

[glorysk87]

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

Maybe I'm crazy, but I totally disagree with your assessment.

 

If you assume IB will be a total flop, you're left with the existing business model, which is largely reliant upon click-based advertising revenue (comprises about 2/3 of their total revenue).  Click-based growth has been slowing significantly, and last quarter actually turned negative YoY.  Since it makes up so much of their total revenue, it dragged down the entire company's revenue growth to only 7% YoY in the 4th quarter.  That's what you're left with if you assume IB is a failure, so how do you envision the company returning to 20%+ growth rates?

 

GAAP EPS on a LTM basis was $1.36.  You can't simply assume that without IB you can return operating expenses growth rates back to 2013 levels...opex growth was largely due to advertising & technology - both required to maintain the business even without IB as a factor and both would have growth faster than revenue even without IB. Not sure why you're attributing all excess opex growth to IB, because it's simply not the case.

 

Dunno - I just don't see how you're rationalizing or justifying the numbers you're putting forward. Seems to be a very optimistic view of the company to me.

[JBTC]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable. 

 

I agree with all the key points mentioned here.

 

It's best to ignore TRIP if you look for 1) some short-term gain or 2) slow and steady type of earnings growth.

 

TRIP in my view can make great sense as a long-term play and hence it's critical to focus on whether it has enduring competitive advantage. If you don't believe that, there's no point in getting involved with TRIP.

 

What I always focus on when thinking about TRIP is its adds a tremendous amount of value to the travelers. What the company needs to do is to simply continue to tinker and experiment and over time get paid sufficiently for the value it delivers.

 

One type of value investing is to look for a low multiple. The second type is to look for earnings that are being under-earned. TRIP is the latter. The second type is more difficult to practice, because most investors would say "where is the earnings? I am not seeing it."

 

[rishig]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable. 

 

I agree with all the key points mentioned here.

 

It's best to ignore TRIP if you look for 1) some short-term gain or 2) slow and steady type of earnings growth.

 

TRIP in my view can make great sense as a long-term play and hence it's critical to focus on whether it has enduring competitive advantage. If you don't believe that, there's no point in getting involved with TRIP.

 

What I always focus on when thinking about TRIP is its adds a tremendous amount of value to the travelers. What the company needs to do is to simply continue to tinker and experiment and over time get paid sufficiently for the value it delivers.

 

One type of value investing is to look for a low multiple. The second type is to look for earnings that are being under-earned. TRIP is the latter. The second type is more difficult to practice, because most investors would say "where is the earnings? I am not seeing it."

 

The same argument could be made at $90. What make this attractive at current price, other than it being close to 52 week low. Or valuation doesn't really matter because the TRIP is so massively under earning that looking at valuation and such is not worth it? Earnings are going to 3-4-5x higher in the next 10 years, and so who cares about valuation?

 

Let me ask you a different question. How big a position it is your portfolio today. And what indicators would cause you to change your thesis?

[JBTC]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable. 

 

I agree with all the key points mentioned here.

 

It's best to ignore TRIP if you look for 1) some short-term gain or 2) slow and steady type of earnings growth.

 

TRIP in my view can make great sense as a long-term play and hence it's critical to focus on whether it has enduring competitive advantage. If you don't believe that, there's no point in getting involved with TRIP.

 

What I always focus on when thinking about TRIP is its adds a tremendous amount of value to the travelers. What the company needs to do is to simply continue to tinker and experiment and over time get paid sufficiently for the value it delivers.

 

One type of value investing is to look for a low multiple. The second type is to look for earnings that are being under-earned. TRIP is the latter. The second type is more difficult to practice, because most investors would say "where is the earnings? I am not seeing it."

 

The same argument could be made at $90. What make this attractive at current price, other than it being close to 52 week low. Or valuation doesn't really matter because the TRIP is so massively under earning that looking at valuation and such is not worth it? Earnings are going to 3-4-5x higher in the next 10 years, and so who cares about valuation?

 

Let me ask you a different question. How big a position it is your portfolio today. And what indicators would cause you to change your thesis?

 

Valuation wasn't the focus of my last post. The fact that I didn't touch on it is no reason for you to suggest I don't care about it. Is that fair?

 

It's clearly more difficult to pin down TRIP's valuation because its future has not yet fully played out. The future is always in the eye of the beholder.

 

This is the way I think about it.

 

1) The low case scenario. This is pretty much what Sionnach outlined in an earlier post. Basically I believe if every effort by TRIP to grab a larger share of booking revenue fails, the co can revert back to its earlier lower-investment, higher-margin model, where EBITDA margin can be maintained in the 40% range. In that case, the company could be worth perhaps a few bucks below the current price.

 

But this is not to say stock cannot trade materially below the current price. If IB fails to gain traction, stock will be sold before costs can be cut. Over time though, costs will be trimmed, growth will continue, and stock can appreciate at a decent clip (say 5-10%).

 

2) Base case. IB will gain traction and in the next 5 years become a significant portion of revenue (say 30%+). Assuming IB generates 2x the click revenue, this may add 60% growth to the existing topline trend and possibly more to the bottomline trend. Stock may double.

 

3) High case. TRIP competes against Goggle and OTAs. PCLN/EXPE are worth $80bn. Google is making perhaps a few billions each years from travel, which is likely high margin and could account for way more than $20bn in market cap (total $510bn). So $100bn+ today up for grabs by TRIP. Over the next decade, people finally learn to remember and spell the word Tripadvisor correctly and head directly to the site without the help from Google. Over time, people get used to booking on their phones and iPads as they literally live their lives on these devices. IB becomes 70%+ of TRIP's revenue. With these events, currently unthinkable, having finally taken place, TRIP grabs 20% of Google/OTAs' then market cap (say $150bn+). By then TRIP should have been up a few times from the current level.

 

I can understand if this is not satisfying for those who are cautious, but that's how I think.

 

As for the position size, I only began to build a position in the past few weeks after having watched TRIP for years. It remains small but I generally spread out my buying. I hope the stock will remain weak and if so it will become a good-sized position for me.

 

By the way, I generally distrust tech investments and TRIP is the only one I own.

 

Near-term earnings or indicators would probably not change my thesis. I will need to wait for business results to pan out in the next five years. 

 

[rishig]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable. 

 

I agree with all the key points mentioned here.

 

It's best to ignore TRIP if you look for 1) some short-term gain or 2) slow and steady type of earnings growth.

 

TRIP in my view can make great sense as a long-term play and hence it's critical to focus on whether it has enduring competitive advantage. If you don't believe that, there's no point in getting involved with TRIP.

 

What I always focus on when thinking about TRIP is its adds a tremendous amount of value to the travelers. What the company needs to do is to simply continue to tinker and experiment and over time get paid sufficiently for the value it delivers.

 

One type of value investing is to look for a low multiple. The second type is to look for earnings that are being under-earned. TRIP is the latter. The second type is more difficult to practice, because most investors would say "where is the earnings? I am not seeing it."

 

The same argument could be made at $90. What make this attractive at current price, other than it being close to 52 week low. Or valuation doesn't really matter because the TRIP is so massively under earning that looking at valuation and such is not worth it? Earnings are going to 3-4-5x higher in the next 10 years, and so who cares about valuation?

 

Let me ask you a different question. How big a position it is your portfolio today. And what indicators would cause you to change your thesis?

 

Valuation wasn't the focus of my last post. The fact that I didn't touch on it is no reason for you to suggest I don't care about it. Is that fair?

 

It's clearly more difficult to pin down TRIP's valuation because its future has not yet fully played out. The future is always in the eye of the beholder.

 

This is the way I think about it.

 

1) The low case scenario. This is pretty much what Sionnach outlined in an earlier post. Basically I believe if every effort by TRIP to grab a larger share of booking revenue fails, the co can revert back to its earlier lower-investment, higher-margin model, where EBITDA margin can be maintained in the 40% range. In that case, the company could be worth perhaps a few bucks below the current price.

 

But this is not to say stock cannot trade materially below the current price. If IB fails to gain traction, stock will be sold before costs can be cut. Over time though, costs will be trimmed, growth will continue, and stock can appreciate at a decent clip (say 5-10%).

 

2) Base case. IB will gain traction and in the next 5 years become a significant portion of revenue (say 30%+). Assuming IB generates 2x the click revenue, this may add 60% growth to the existing topline trend and possibly more to the bottomline trend. Stock may double.

 

3) High case. TRIP competes against Goggle and OTAs. PCLN/EXPE are worth $80bn. Google is making perhaps a few billions each years from travel, which is likely high margin and could account for way more than $20bn in market cap (total $510bn). So $100bn+ today up for grabs by TRIP. Over the next decade, people finally learn to remember and spell the word Tripadvisor correctly and head directly to the site without the help from Google. Over time, people get used to booking on their phones and iPads as they literally live their lives on these devices. IB becomes 70%+ of TRIP's revenue. With these events, currently unthinkable, having finally taken place, TRIP grabs 20% of Google/OTAs' then market cap (say $150bn+). By then TRIP should have been up a few times from the current level.

 

I can understand if this is not satisfying for those who are cautious, but that's how I think.

 

As for the position size, I only began to build a position in the past few weeks after having watched TRIP for years. It remains small but I generally spread out my buying. I hope the stock will remain weak and if so it will become a good-sized position for me.

 

By the way, I generally distrust tech investments and TRIP is the only one I own.

 

Near-term earnings or indicators would probably not change my thesis. I will need to wait for business results to pan out in the next five years.

 

Sorry, I didn't mean to suggest you don't care about valuation. Here is why I am asking this question:

 

I owned Tripadvisor when it spun out of Expedia. It sold off a bit and I purchased it at ~$25 in Dec 2011. It was at a rich valuation - about 25x forward P/E. About a year later, Liberty announced that they acquired a majority stake and the stock ran up to $40-$45. I sold about 6 months after that at around $59-$60 because the valuation looked too dear, despite all the great things I was expecting Trip to do over the next 5-10 years.

 

Here we are about 3 years later, Trip's business has continued to do well, but the stock is flat. The issue with buying at a high valuation (yes, I understand it is under-earning in your opinion) is you got to be absolutely correct on the upside. This means I need to have an analytical edge on my understanding of the business. If one is incorrect, then the opportunity cost is too high.

 

I find it easier to bet on my ability to make bets based on psychological superiority relative to Mr. Market rather than my analytical ability. I don't think I generally have a superior insights into the business. I am just of the opinion that I don't know what I don't know, but I can make a contrarian bet when Mr. Market is too focused on temporary issues. But that's just me. 

 

Another example of this - MasterCard when it went IPO had operating margin of 8%. I have followed it since then and I don't remember ever reading any analyst report or talking to anyone in the value investing community who envisioned that operating margin 3 years from then could be at 50%. I was quite surprised to see it at 50% 3 years later. If you had that kind of superior insight, this would have been a 50 bagger.

 

However, even if I didn't have this super insight, great businesses go through temporary setbacks. Such a setback occurred in case of MasterCard in Dec 2010, when it was trading at 14x P/E due to concerns about regulations of debit interchange fees. Now, one didn't need to have any superior insight into the business to act. Just a psychological edge was good enough. Although not as good as 50x, the stock has been a 5 bagger since then (it is my largest position today).

 

May be it's just me, but if Trip indeed makes the transition to this amazing business model, sure I will miss out on the run up. But it will not be the end. Very likely Trip will get sold off after that due to some temporary issue. The time to act for me would be at that time - the bet wouldn't be on superior insight but just basic contrarianism. One of the board members (rainforesthiker) wrote this wonderful book that I love and have read it multiple times: "Inefficient Market Theory: An Investment Framework Based on the Foolishness of the Crowd" which expands on this style of investing.

 

Again, not to say that's what everyone should do. If you have superior insight into the business, you should act. Just pointing out that is important to know that the bet is on superior insight. Is this a fair characterization of your bet? If not, feel free to correct me.

[JBTC]

I recently started a position in TripAdvisor and have been using the website and following the company for several years now.

 

There is a lot of talk that a TRIP investment hinges on the success of Instant Book. I don't believe this to be the case; rather, IB is a potential homerun for the company, but does not alter TRIP's business model if it doesn't gain traction.

 

There were some good analogies to the online travel industry as a funnel progressing Google->TripAdvisor->OTA. Revenue is only generated by the OTA at the bottom of the funnel. In 2014, Expedia and Priceline spent about 3.8B on online advertising which is ~30% of their revenue. The OTA's are growing revenue at around ~20%; so organic growth in online advertising should be at least 20% per year in the upper part of the funnel as well.

 

So in TripAdvisor's non IB dependent model you essentially have Trip vs. Google competing for 30% of the OTA markets' revenue. The question I asked myself for who will win this competition is which platform ultimatley provides the most value to their end user? In planning a vacation or even work travel, I see TripAdvisors website as vastly superior to that of a search engine and Trip's share of the OTA revenue should grow faster than Google's.

 

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

TripAdvisor's Moat:

 

The popularity of mobile app makes adding pictures and reviews even easier for users. The number of reviews/opinions on the site grew 70% to over 300M between 2014 and 2015. Their competitive advantage is not only driven by their number of reviews but by current reviews. I.e. a review from 2014 of a all-inclusive in Jamaica doesn't give me the same value as one written in December of 2015 because the condition of hotels (and constant renovation) is always changing; alternatively, a hotel may get all kinds of noise complaints due to spring break in March but be a quiet setting in September. The growth rate in reviews means users have a constant stream of near real time data and data from all times of year to use plan trips.

 

TripAdvisor also has a strong offline presence in vacation destinations. Tour opererators show off their TripAdvisor ratings and ask for satisfied patrons to support them by telling others about their experience on TripAdvisor.

 

Both the number and frequency of reviews (~5 new reviews per second) along with TripAdvisors offline presence make the business extremely durable. 

 

I agree with all the key points mentioned here.

 

It's best to ignore TRIP if you look for 1) some short-term gain or 2) slow and steady type of earnings growth.

 

TRIP in my view can make great sense as a long-term play and hence it's critical to focus on whether it has enduring competitive advantage. If you don't believe that, there's no point in getting involved with TRIP.

 

What I always focus on when thinking about TRIP is its adds a tremendous amount of value to the travelers. What the company needs to do is to simply continue to tinker and experiment and over time get paid sufficiently for the value it delivers.

 

One type of value investing is to look for a low multiple. The second type is to look for earnings that are being under-earned. TRIP is the latter. The second type is more difficult to practice, because most investors would say "where is the earnings? I am not seeing it."

 

The same argument could be made at $90. What make this attractive at current price, other than it being close to 52 week low. Or valuation doesn't really matter because the TRIP is so massively under earning that looking at valuation and such is not worth it? Earnings are going to 3-4-5x higher in the next 10 years, and so who cares about valuation?

 

Let me ask you a different question. How big a position it is your portfolio today. And what indicators would cause you to change your thesis?

 

Valuation wasn't the focus of my last post. The fact that I didn't touch on it is no reason for you to suggest I don't care about it. Is that fair?

 

It's clearly more difficult to pin down TRIP's valuation because its future has not yet fully played out. The future is always in the eye of the beholder.

 

This is the way I think about it.

 

1) The low case scenario. This is pretty much what Sionnach outlined in an earlier post. Basically I believe if every effort by TRIP to grab a larger share of booking revenue fails, the co can revert back to its earlier lower-investment, higher-margin model, where EBITDA margin can be maintained in the 40% range. In that case, the company could be worth perhaps a few bucks below the current price.

 

But this is not to say stock cannot trade materially below the current price. If IB fails to gain traction, stock will be sold before costs can be cut. Over time though, costs will be trimmed, growth will continue, and stock can appreciate at a decent clip (say 5-10%).

 

2) Base case. IB will gain traction and in the next 5 years become a significant portion of revenue (say 30%+). Assuming IB generates 2x the click revenue, this may add 60% growth to the existing topline trend and possibly more to the bottomline trend. Stock may double.

 

3) High case. TRIP competes against Goggle and OTAs. PCLN/EXPE are worth $80bn. Google is making perhaps a few billions each years from travel, which is likely high margin and could account for way more than $20bn in market cap (total $510bn). So $100bn+ today up for grabs by TRIP. Over the next decade, people finally learn to remember and spell the word Tripadvisor correctly and head directly to the site without the help from Google. Over time, people get used to booking on their phones and iPads as they literally live their lives on these devices. IB becomes 70%+ of TRIP's revenue. With these events, currently unthinkable, having finally taken place, TRIP grabs 20% of Google/OTAs' then market cap (say $150bn+). By then TRIP should have been up a few times from the current level.

 

I can understand if this is not satisfying for those who are cautious, but that's how I think.

 

As for the position size, I only began to build a position in the past few weeks after having watched TRIP for years. It remains small but I generally spread out my buying. I hope the stock will remain weak and if so it will become a good-sized position for me.

 

By the way, I generally distrust tech investments and TRIP is the only one I own.

 

Near-term earnings or indicators would probably not change my thesis. I will need to wait for business results to pan out in the next five years.

 

Sorry, I didn't mean to suggest you don't care about valuation. Here is why I am asking this question:

 

I owned Tripadvisor when it spun out of Expedia. It sold off a bit and I purchased it at ~$25 in Dec 2011. It was at a rich valuation - about 25x forward P/E. About a year later, Liberty announced that they acquired a majority stake and the stock ran up to $40-$45. I sold about 6 months after that at around $59-$60 because the valuation looked too dear, despite all the great things I was expecting Trip to do over the next 5-10 years.

 

Here we are about 3 years later, Trip's business has continued to do well, but the stock is flat. The issue with buying at a high valuation (yes, I understand it is under-earning in your opinion) is you got to be absolutely correct on the upside. This means I need to have an analytical edge on my understanding of the business. If one is incorrect, then the opportunity cost is too high.

 

I find it easier to bet on my ability to make bets based on psychological superiority relative to Mr. Market rather than my analytical ability. I don't think I generally have a superior insights into the business. I am just of the opinion that I don't know what I don't know, but I can make a contrarian bet when Mr. Market is too focused on temporary issues. But that's just me. 

 

Another example of this - MasterCard when it went IPO had operating margin of 8%. I have followed it since then and I don't remember ever reading any analyst report or talking to anyone in the value investing community who envisioned that operating margin 3 years from then could be at 50%. I was quite surprised to see it at 50% 3 years later. If you had that kind of superior insight, this would have been a 50 bagger.

 

However, even if I didn't have this super insight, great businesses go through temporary setbacks. Such a setback occurred in case of MasterCard in Dec 2010, when it was trading at 14x P/E due to concerns about regulations of debit interchange fees. Now, one didn't need to have any superior insight into the business to act. Just a psychological edge was good enough. Although not as good as 50x, the stock has been a 5 bagger since then (it is my largest position today).

 

May be it's just me, but if Trip indeed makes the transition to this amazing business model, sure I will miss out on the run up. But it will not be the end. Very likely Trip will get sold off after that due to some temporary issue. The time to act for me would be at that time - the bet wouldn't be on superior insight but just basic contrarianism. One of the board members (rainforesthiker) wrote this wonderful book that I love and have read it multiple times: "Inefficient Market Theory: An Investment Framework Based on the Foolishness of the Crowd" which expands on this style of investing.

 

Again, not to say that's what everyone should do. If you have superior insight into the business, you should act. Just pointing out that is important to know that the bet is on superior insight. Is this a fair characterization of your bet? If not, feel free to correct me.

 

Thanks for providing the context.

 

Yes to a large degree, my bet is based on my view that 1) TRIP adds perhaps greater value to the travelers than Google/OTAs but gets paid the least, and 2) TRIP likely has a stronger moat than Google in the travel sector and OTAs but perhaps is not valued as such.

 

I had owned both Google and PCLN in the past but not TRIP. My view is strong enough that I now have TRIP, but neither Google nor PCLN.

 

If my view turns out to be correct, it may then be called an insight. If not it's just a wrong view.

 

To a lesser degree though, my bet is also based on the thinking that if it turns out no one wants to book on TRIP, the company can remain so highly profitable that I will not lose money on my investment. On this point, I feel I am also making a straightforward contrarian bet that you like to make.

 

In the past three years, TRIP ran up to $110 and fell to $60. My guess is when the market was bullish LT, it bid it up. When the market was less bullish about the future and turned to near-term earnings, it sold it off. I am hoping that by starting to pick it up now, I am also taking advantage of the market's random moves.

 

More generally, I don't feel we can judge anything if a stock doesn't move for three years.

 

You brought up MA. Think about it, there's much similarity between MA and TRIP. I didn't feel you must be able to foresee its margin expansion in order to buy it during the early days. If anyone recognized two key facts: 1) MA and Visa enable an ever expanding share of commerce, and 2) MA and Visa have a moat that can't be taken away, there's probably enough to make a decision to own them. In hindsight, those two factors are superior insights.

 

At the risk of being overly repetitive, I think TRIP 1) is a key enabler of online travel purchase and 2) has a moat that is hard to take away. I don't believe anyone can model revenues and margins precisely in coming years, so I usually don't focus on putting down hard numbers just to increase my conviction.

 

Let me also say I very much admire your being both opportunistic and very patient. As I said before, there can easily be opportunities to buy TRIP once there are increasing signs of IB not panning out. You would make very good money.

 

In the end, I tend to think even in your way of operating you always need both insights and contrarian mentality. In your buying of MA in 2010, you likely believed the market structure would remain broadly intact despite the incident, while many who didn't believe MA as strongly gave up. If so you still retained an analytical edge, in addition to your mental one.

 

Anyway, I think we had a good discussion here. Thank you for that. 

 

[JBTC]

 

Great comments. A business model adjustment results in two things: a wobble in earnings and investor uncertainty. So you get multiple compression on top of depressed earnings. And if the transition works, you get revenue acceleration on the other side.

 

Obviously, you need to be selective. But off the top of my head, here are a few business model changes that worked:

Google - transition to mobile http://www.thestreet.com/story/11742377/1/googles-mobile-mess.html

Facebook - transition to mobile http://marketrealist.com/2014/01/facebook-ipo/

Cimpress (vistaprint) - moved up-market http://docslide.us/documents/2012-q3-letter-kcm.html

Adobe - transition to Cloud http://www.bloomberg.com/news/articles/2012-04-23/adobe-s-cloud-math-means-new-programs-will-sell-for-less

 

Eric Khrom described this as riding the "j-curve" (I assume he didn't invent the term but I've found it a useful investment framework).

 

On desktop, I somewhat agree. But on mobile, there is an enormous advantage to get your reviews and booking done in a single app.

 

Which leads me to my next point - how many people are actually booking vacations on mobile devices? I've done a lot of research on consumer spending patterns on mobile vs. desktop, and the overwhelming evidence is that while people tend to do a lot of research on mobile, they very consistently switch to desktop to make the actual purchase.  This is where I fear TRIP loses the customer.  It's easy to do research and look up reviews on the TRIP mobile app. But if I'm spending a few thousand dollars for a vacation, I almost certainly will switch to my desktop to complete the purchase process and most likely will end up at another site to make the reservation/purchase.

 

The above point is the same thing I have heard from people I have talked to in SEM. The question I asked is why is Priceline Group (i.e. booking.com) spending huge dollars on SEM. The answer I got is what you stated above - booking a 3+ day trip is a large purchase and an important experience. Almost no one does it on a mobile phone.

 

If anyone knows a thing or two about online hotel booking, it's a guy called Darren.

 

And he says the following -

 

"Finally and importantly, it is worth commenting on mobile. It is difficult to overstate the importance of this trend. Today as a group, about one of three bookings of hotels, rental cars and restaurants happens on a mobile device. At current run rate, this will be more than half of our business in only two to three years.

 

On a Sunday just a week back, we completed 300,000 transactions gross of cancellations on mobile at Booking.com for the first time. All of our brands are investing heavily in making our products relevant to consumers across all their screens in a connected fashion and in ways that are industry-leading."

 

[Ross812]

If you assume IB will be a total flop, the growth and quality of the business model already supports the share price. If you assume TRIP increased OPEX at the same rate as revenue since Q1 of 2013 (approximately stripping out IB spending) then 2015 OPEX would be approximately 900M. This puts the after tax earning potential somewhere in the $2.50 to $3 per share range. Puting you at a PE of 20-24 for a business growing ~20% per year.

 

Maybe I'm crazy, but I totally disagree with your assessment.

 

If you assume IB will be a total flop, you're left with the existing business model, which is largely reliant upon click-based advertising revenue (comprises about 2/3 of their total revenue).  Click-based growth has been slowing significantly, and last quarter actually turned negative YoY.  Since it makes up so much of their total revenue, it dragged down the entire company's revenue growth to only 7% YoY in the 4th quarter.  That's what you're left with if you assume IB is a failure, so how do you envision the company returning to 20%+ growth rates?

 

GAAP EPS on a LTM basis was $1.36.  You can't simply assume that without IB you can return operating expenses growth rates back to 2013 levels...opex growth was largely due to advertising & technology - both required to maintain the business even without IB as a factor and both would have growth faster than revenue even without IB. Not sure why you're attributing all excess opex growth to IB, because it's simply not the case.

 

Dunno - I just don't see how you're rationalizing or justifying the numbers you're putting forward. Seems to be a very optimistic view of the company to me.

 

The number I threw out is a wild guess trying to understand the actual earnings power of TripAdvisor. In 2012 GAAP EPS was $1.37. Since 2012 unique visitors per month are up 200%, mobile app downloads have gone from 40M to 300M (up 750%), and 75M reviews grew to over 300M (up 400%), and revenue has gone up 260%. What is the actual earnings power of their 2015 business vs their 2012, on a GAAP basis it is identical...

 

If you hold their 2012 R&D expenses steady at 90M which includes full app development for both mobile OS's and I assume regular website updates without the business model changes you can get to earnings of $2.20. This is leaving in all the advertising (which a portion of is unnecessary if they did not have to promote their new initiatives) and excludes the impact to click based revenue from both IB (2014-15) and the price comparison tool added to their site in 2013.

 

Your point of click based revenue coming under pressure is the same issue seen in 2013 when TripAdvisor added their price comparison tool and asked add buyers to bid for add placement. The company has stated they expect click based revenue to resume growth in 2017. Also YOY revenue was up 15% on a constant currency basis.

 

We can go around and around with numbers all day, but all that really matters is asking if the earnings power of the company is understated. The breakdown of the real numbers is only known by management who have been net buyers over the past two years increasing their net holdings 40%. In fact, no one on the C-block or the board has been a net seller in the past two years.

[Ross812]

The same argument could be made at $90. What make this attractive at current price, other than it being close to 52 week low. Or valuation doesn't really matter because the TRIP is so massively under earning that looking at valuation and such is not worth it? Earnings are going to 3-4-5x higher in the next 10 years, and so who cares about valuation?

 

Let me ask you a different question. How big a position it is your portfolio today. And what indicators would cause you to change your thesis?

 

Rishig, I would say looking at GAAP earnings right now gives you a starting point in understanding the earnings power of Trip, but can't be relied upon for any sort of valuation. Earnings have remained the same since Q4'11 and in that time the company has developed a mobile app with 300M downloads, doubled its visitors, and grown reviews by 4x. I first looked at this in 2011 and thought it was a really cool site but I thought Priceline, Google, or Expedia would gain traction with their own review platforms and kill Trip. 4 years later, we are arguing about Tripadvisor providing more value to travelers than Google, and Trip now has a platform that could take a bigger chunk on OTA revenue in the future than their 2012 model. I would argue in 2012 Trip had a very weak moat and their earning potential years out was much less clear than it is today.

 

I own PCLN too and think they have a wonderful business model. I see no reason why Trip cannot continue to capture revenue from the upper part of the funnel and grow with the OTA's. I am unclear weather IB will workout and Trip actually becomes a threat to the OTAs in the long run. It is a free call option on a home run, but the core of the business has grown to become the best place to get travel advice and will become far more valuable to the travel industry than a search engine. I don't see anyway it can be replaced or replicated at this point.

 

The value of TripAdvisor is really tied to where you see the internet in 10 years. In the last 5-10 years I have seen a huge shift to the winners on the internet:

 

Search engines: 4 became 1

OTA: 5 became 2

Shopping: hundreds dominated by 1

House shopping: many down to a 3

and so on

 

As brands gain dominance and trust, the value of the search engines as the top of the funnel becomes less and less. Users are starting to plan their entire vacation on TripAdvisor. Type "activities to do in Rome" in Google then do it again at Trip and tell me what gives you more value. 

 

As for earnings potential in 10 years. Online advertising from the OTAs in 10 years should be around 20B. That sounds really high so let's just say 10B. If Trip can capture half of this as the most valuable part of the funnel you are looking at 5B in revenue based on their legacy model. Subscription and banner based advertising is actually growing faster than click based but lets assume it stays at 30% of revenue. So we are looking at a path to 6.5B in revenue in 10 years without instant book. Obviously the assumption Trip can capture half of OTA advertising is a big leap, but I can't think of a better place to contact travelers on the internet.

 

Added:

 

TripAdvisor is only a small position for me right now. Only 1.5% compared to 3% for both Google and Pcln. I would add to the position if IB starts to gain traction or opportunistically if it is offered on sale.  To change my thesis I would need to see the OTA's producing travel tools that make Trip less relevant; Google producing results that are more relevant than the same query at Trip; new online reviews below 90M per year (3 per second); or a scandal that erodes the trust between users and TripAdvisor (I view this as a big threat).