TRIP - Tripadvisor Inc.

[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.

 

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.

 

I didn't buy it in the early days, because I thought at 8% operating margin it was an okay business (but it really was under earning similar to how TRIP is as per you). Having missed that boat was totally fine for me, I kept learning the business. Operating margins grew to 50% and I saw how powerful the model was. Then, in Dec 2010, it dropped to 14x P/E, I don't think one needed any superior insight to invest in MA at that point - they weren't changing around their business model, and the debit regulation was overblown especially because MA was a far away second in the debit business. It was cheap on an absolute basis. Getting on the ground floor of massive growth *only* works when you have superior insight and you are right. On the other hand, one can buy a proven business at cheap when they go through temporary issues.

 

I hear your argument about why TRIP will be a great business capturing huge growth. This isn't my game. I'll wait for TRIP to get to its LT business model (if they do) and for a time when it gets sold because of a temporary issue.

[JBTC]

 

As brands gain dominance and trust, the value of the search engines as the top of the funnel becomes less and less.

 

 

I'd like to think so but wonder - is there any evidence for this statement?

 

Also, Google is keenly interested in travel and its travel search has gone through many iterations.

 

Do you know of any other vertical where Google has shown a similar interest?

 

[Ross812]

 

As brands gain dominance and trust, the value of the search engines as the top of the funnel becomes less and less.

 

 

I'd like to think so but wonder - is there any evidence for this statement?

 

Also, Google is keenly interested in travel and its travel search has gone through many iterations.

 

Do you know of any other vertical where Google has shown a similar interest?

 

I think the biggest change you have seen is a trend down in Google's cost per click adds vs that of niche sites like TripAdvisor. CPC is difficult to compare YOY because of the impact of mobile and its associated lower CPC rate. I think you can look at mobile growth rate vs CPC rates and draw some conclusions though.

 

2014 vs 2015 Google saw an increase in mobile traffic of 7% and CPC declined 16%.

 

2014 vs 2105 TripAdvisor saw an increase in mobile traffic of 53% and CPC declined 6%.

 

Both Google and Trip derive a have a good portion of foreign revenue, 53% vs 48% respectively. For TripAdvisor, they stated this had a 71M impact on CPC revenue so CPC would have been 7.5% higher on a constant currency basis and YOY CPC would have been flat to a 1.5% gain. Let's give Google an 8.5% bump on a constant currency basis and you have CPC declines of 7.5% for Google and a gain of 1.5% for TripAdvisor despite Trip growing mobile usage at 53% vs Googles 7%.     

 

Google and travel:

 

The only other place I have seen Google show keen interest in vertical integration is online shopping. You have a shopping tab and price comparison tool right on Google's landing page and the launch of Google Express. In my opinion, Google is excels at aggregating data be that airline ticket prices, the price of a product, traffic patterns, popular times at restaurants, or showing a list of hotels in a radius with prices and a few reviews. What they do not excel at is social interaction between users. Google plus has never really caught on and they don't have a significant number of reviews for products or destinations (compared to Amazon or TripAdvisor). Even some of their Android apps which are actually quite good like hangouts are bested by 3rd party apps like snapchat and whatsapp.

 

Google has a lot of smart people working for them and it's only natural they are going to put a group on lines of business where there is a lot of revenue to be generated like shopping or travel. Thus far, to my knowledge, they have never been successful at creating a new service which sinks the incumbent player. This is a risk for sure though, not only to TripAdvisor but more specifically to Priceline and Expedia, because that is where the majority of the revenue is generated. 

[JBTC]

 

As brands gain dominance and trust, the value of the search engines as the top of the funnel becomes less and less.

 

 

I'd like to think so but wonder - is there any evidence for this statement?

 

Also, Google is keenly interested in travel and its travel search has gone through many iterations.

 

Do you know of any other vertical where Google has shown a similar interest?

 

I think the biggest change you have seen is a trend down in Google's cost per click adds vs that of niche sites like TripAdvisor. CPC is difficult to compare YOY because of the impact of mobile and its associated lower CPC rate. I think you can look at mobile growth rate vs CPC rates and draw some conclusions though.

 

2014 vs 2015 Google saw an increase in mobile traffic of 7% and CPC declined 16%.

 

2014 vs 2105 TripAdvisor saw an increase in mobile traffic of 53% and CPC declined 6%.

 

Both Google and Trip derive a have a good portion of foreign revenue, 53% vs 48% respectively. For TripAdvisor, they stated this had a 71M impact on CPC revenue so CPC would have been 7.5% higher on a constant currency basis and YOY CPC would have been flat to a 1.5% gain. Let's give Google an 8.5% bump on a constant currency basis and you have CPC declines of 7.5% for Google and a gain of 1.5% for TripAdvisor despite Trip growing mobile usage at 53% vs Googles 7%.     

 

Google and travel:

 

The only other place I have seen Google show keen interest in vertical integration is online shopping. You have a shopping tab and price comparison tool right on Google's landing page and the launch of Google Express. In my opinion, Google is excels at aggregating data be that airline ticket prices, the price of a product, traffic patterns, popular times at restaurants, or showing a list of hotels in a radius with prices and a few reviews. What they do not excel at is social interaction between users. Google plus has never really caught on and they don't have a significant number of reviews for products or destinations (compared to Amazon or TripAdvisor). Even some of their Android apps which are actually quite good like hangouts are bested by 3rd party apps like snapchat and whatsapp.

 

Google has a lot of smart people working for them and it's only natural they are going to put a group on lines of business where there is a lot of revenue to be generated like shopping or travel. Thus far, to my knowledge, they have never been successful at creating a new service which sinks the incumbent player. This is a risk for sure though, not only to TripAdvisor but more specifically to Priceline and Expedia, because that is where the majority of the revenue is generated.

 

Good analysis on the mobile traffic and CPC comparison.

 

What I was wondering is if Google sees what you and I see. Sure Google is making a ton of easy money for now by sending the casual travelers to booking.com and hotels.com, but in the long run Google must know the value they generate is little.

 

A huge part of the information about hotels in the world now resides in TRIP, Booking, and Hotels.com (and a few minor sites). Google as a search engine does not discover anything new.

 

Assume travel is the most lucrative vertical for Google and assume they are aware of the very limited traction of its travel search despite a decade of nonstop effort. What can Google do to protect its travel revenue?

 

Does it make sense for Google to buy TRIP? Personally I hope not.

 

[Ross812]

 

As brands gain dominance and trust, the value of the search engines as the top of the funnel becomes less and less.

 

 

I'd like to think so but wonder - is there any evidence for this statement?

 

Also, Google is keenly interested in travel and its travel search has gone through many iterations.

 

Do you know of any other vertical where Google has shown a similar interest?

 

I think the biggest change you have seen is a trend down in Google's cost per click adds vs that of niche sites like TripAdvisor. CPC is difficult to compare YOY because of the impact of mobile and its associated lower CPC rate. I think you can look at mobile growth rate vs CPC rates and draw some conclusions though.

 

2014 vs 2015 Google saw an increase in mobile traffic of 7% and CPC declined 16%.

 

2014 vs 2105 TripAdvisor saw an increase in mobile traffic of 53% and CPC declined 6%.

 

Both Google and Trip derive a have a good portion of foreign revenue, 53% vs 48% respectively. For TripAdvisor, they stated this had a 71M impact on CPC revenue so CPC would have been 7.5% higher on a constant currency basis and YOY CPC would have been flat to a 1.5% gain. Let's give Google an 8.5% bump on a constant currency basis and you have CPC declines of 7.5% for Google and a gain of 1.5% for TripAdvisor despite Trip growing mobile usage at 53% vs Googles 7%.     

 

Google and travel:

 

The only other place I have seen Google show keen interest in vertical integration is online shopping. You have a shopping tab and price comparison tool right on Google's landing page and the launch of Google Express. In my opinion, Google is excels at aggregating data be that airline ticket prices, the price of a product, traffic patterns, popular times at restaurants, or showing a list of hotels in a radius with prices and a few reviews. What they do not excel at is social interaction between users. Google plus has never really caught on and they don't have a significant number of reviews for products or destinations (compared to Amazon or TripAdvisor). Even some of their Android apps which are actually quite good like hangouts are bested by 3rd party apps like snapchat and whatsapp.

 

Google has a lot of smart people working for them and it's only natural they are going to put a group on lines of business where there is a lot of revenue to be generated like shopping or travel. Thus far, to my knowledge, they have never been successful at creating a new service which sinks the incumbent player. This is a risk for sure though, not only to TripAdvisor but more specifically to Priceline and Expedia, because that is where the majority of the revenue is generated.

 

Good analysis on the mobile traffic and CPC comparison.

 

What I was wondering is if Google sees what you and I see. Sure Google is making a ton of easy money for now by sending the casual travelers to booking.com and hotels.com, but in the long run Google must know the value they generate is little.

 

A huge part of the information about hotels in the world now resides in TRIP, Booking, and Hotels.com (and a few minor sites). Google as a search engine does not discover anything new.

 

Assume travel is the most lucrative vertical for Google and assume they are aware of the very limited traction of its travel search despite a decade of nonstop effort. What can Google do to protect its travel revenue?

 

Does it make sense for Google to buy TRIP? Personally I hope not.

 

I don't think Google would buy TRIP. For one thing, Trip has revenue of 1.5B vs Google's Revenue of 67.4B. The online advertising pie from the OTA's is ~4.4B in 2015 (PCLN 2.8B; I increased EXPE 21% from the 2014 1.3B). TRIP has said 46% of their revenue came from PCLN and EXPE so they have $690M of this pie, meaning Google is still getting the majority of the left over 3.7B. Google will certainly try to protect it OTA revenue, but I think they will have to provide more relevant results rather than paying 16B to 17B  for TRIP to nab the the 690M they are missing right now.

 

I don't really know the end game for the search engines. I think we are still a good 15-20 years from the internet maturing; meaning you will start to see Googles Add revenue peak and start to decline reaching some sort of terminal level as a utility type business. That terminal level could be multiples of today's revenue though. Ultimately, I believe google will dominate internet infrastructure. Cloud, search, service provider, security provider, email, video, you name it. At that point it won't look like the growth company it is today, but will have an enormous moat like the utility sector today.

[JBTC]

 

I don't think Google would buy TRIP. For one thing, Trip has revenue of 1.5B vs Google's Revenue of 67.4B. The online advertising pie from the OTA's is ~4.4B in 2015 (PCLN 2.8B; I increased EXPE 21% from the 2014 1.3B). TRIP has said 46% of their revenue came from PCLN and EXPE so they have $690M of this pie, meaning Google is still getting the majority of the left over 3.7B. Google will certainly try to protect it OTA revenue, but I think they will have to provide more relevant results rather than paying 16B to 17B  for TRIP to nab the the 690M they are missing right now.

 

 

Sure, if Google doesn't feel threatened then there's no point in chasing after TRIP. But in your earlier post you suggested TRIP might capture 50% of the OTA ad spending down the road. If so Google would lose significant market share in travel.

 

Keep in mind that in addition to the OTA spend, all the hotels individually are spending money with Google. We don't know how big that spending is, but it seems the overall exposure of Google to travel is huge.

 

If the mobile traffic and CPC stats you cited earlier are indeed a good indicator of how Google performed in travel vs. TRIP, it seems conceivable that Google was losing share fast in one of its most important lines of business.

 

Is this not the right way to think?

 

[rishig]

 

I don't think Google would buy TRIP. For one thing, Trip has revenue of 1.5B vs Google's Revenue of 67.4B. The online advertising pie from the OTA's is ~4.4B in 2015 (PCLN 2.8B; I increased EXPE 21% from the 2014 1.3B). TRIP has said 46% of their revenue came from PCLN and EXPE so they have $690M of this pie, meaning Google is still getting the majority of the left over 3.7B. Google will certainly try to protect it OTA revenue, but I think they will have to provide more relevant results rather than paying 16B to 17B  for TRIP to nab the the 690M they are missing right now.

 

 

Sure, if Google doesn't feel threatened then there's no point in chasing after TRIP. But in your earlier post you suggested TRIP might capture 50% of the OTA ad spending down the road. If so Google would lose significant market share in travel.

 

Keep in mind that in addition to the OTA spend, all the hotels individually are spending money with Google. We don't know how big that spending is, but it seems the overall exposure of Google to travel is huge.

 

If the mobile traffic and CPC stats you cited earlier are indeed a good indicator of how Google performed in travel vs. TRIP, it seems conceivable that Google was losing share fast in one of its most important lines of business.

 

Is this not the right way to think?

 

The search engines are in the aggregation of click business. As long as people go on search engines and search for generic terms such as "travel", "travel deals", "travel insurance", "travel deals to"  (the top 5 travel keywords as per https://www.wordstream.com/popular-keywords/travel-keywords), search engines will continue to monetize these clicks.

 

As far as how clickthrough rates are doing for travel keywords, see here:

https://www.adgooroo.com/resources/blog/travel-clickthrough-rates-increase-in-paid-search-post-right-rail-era/

 

The intent of people searching on search engines is different from the intent of those using TRIP or OTA. They are at different points in the funnel, and arguing one is taking market share from the other (today) doesn't make sense to me. These are complimentary in function. One could argue that TRIP could take OTA market share by IB, but saying that TRIP will take search engine market share seems a bit out there.

 

Again, this logic that as long as people remember to type tripadvisor.com in their browser means the demise of the search engine in the travel vertical is the same as saying that people remember to type Amazon.com in their browser means the demise of all product related keywords and Amazon should not be spending any money on the search engine. Totally not true. Search for a product and you will see Amazon as the first sponsored search.

 

So, here is a question - 5 to 10 years from now, how important is the top of the funnel where the intent is very vague. If you see a world where this is irrelevant, then you should go long on any vertical specialized platform and short the search engine(s).

[Ross812]

I was digging around AdGooroo article that Rishig linked and found this chart interesting:

 

http://www.adgooroo.com/wp-content/uploads/2015/03/Expedia-vs-Priceline-Travel-Spend-2014_AdGooroo.jpg

 

Let's just consider Priceline for the moment because I know Rishig is familiar with them. From PCLN's 2014 Annual Report:

 

During 2014 , our total online advertising expense was approximately $2.4

billion , a substantial portion of which was spent internationally through Internet search engines (primarily Google), meta-search and travel

research services and affiliate marketing

 

My guess at TRIP's portion of Priceline's 2014 ad spend is 370M. To get this, TRIP said 46% of their revenue came from EXPE and PCLN combined. PCLN spent 2.4B and EXPE 1.3B, so I guessed PCLN spent ~65% of the 46% of TRIPS revenue - 1246M * 46% * 65% ~ 370M or 15% of PCLN's ad spend.

 

So is the AdGooroo website number just nonsense? I found this article which references PCLN's 2013 online ad spending as 90% Google:

 

  http://www.bloomberg.com/news/articles/2014-04-14/priceline-seeks-results-from-facebook-as-google-wins-ads

 

This seems a little more accurate as PCLN doesn't have a huge presence on Facebook, Twitter, or Instagram. Though I would expect for PCLN to be spending ~30% of their search engine spend on other search engines as Google only has 65% of the search market.

 

So PCLN's online advertising budget probably looks like this:  55% Google, 20% other search engines, 15% Trip, 10% all other referral sites (trivalgo, travel blogs etc).

 

 

Sure, if Google doesn't feel threatened then there's no point in chasing after TRIP. But in your earlier post you suggested TRIP might capture 50% of the OTA ad spending down the road. If so Google would lose significant market share in travel.

 

Keep in mind that in addition to the OTA spend, all the hotels individually are spending money with Google. We don't know how big that spending is, but it seems the overall exposure of Google to travel is huge.

 

If the mobile traffic and CPC stats you cited earlier are indeed a good indicator of how Google performed in travel vs. TRIP, it seems conceivable that Google was losing share fast in one of its most important lines of business.

 

Is this not the right way to think?

 

 

I would think TRIP is more attractive to the OTAs and PCLN and EXPE have shown the willingness to buy the referring sites Kayak and Trivago in the past. Though TRIP may be too big for them to buy at this point.  I looked through a Wikipedia article listing all of Google's acquisitions and outside of YouTube I didn't see any independent advertising platforms purchased to remain as a google website. Most of the time Google purchased companies to expand or enhance their core portfolio. I'm not saying Google may not be interested in TRIP but it would be uncharacteristic for them. TRIP would likely have to be acquired for at least 16B too which would be Google's largest acquisition to date. 

 

The search engines are in the aggregation of click business. As long as people go on search engines and search for generic terms such as "travel", "travel deals", "travel insurance", "travel deals to"  (the top 5 travel keywords as per https://www.wordstream.com/popular-keywords/travel-keywords), search engines will continue to monetize these clicks.

 

As far as how clickthrough rates are doing for travel keywords, see here:

https://www.adgooroo.com/resources/blog/travel-clickthrough-rates-increase-in-paid-search-post-right-rail-era/

 

The intent of people searching on search engines is different from the intent of those using TRIP or OTA. They are at different points in the funnel, and arguing one is taking market share from the other (today) doesn't make sense to me. These are complimentary in function. One could argue that TRIP could take OTA market share by IB, but saying that TRIP will take search engine market share seems a bit out there.

 

Again, this logic that as long as people remember to type tripadvisor.com in their browser means the demise of the search engine in the travel vertical is the same as saying that people remember to type Amazon.com in their browser means the demise of all product related keywords and Amazon should not be spending any money on the search engine. Totally not true. Search for a product and you will see Amazon as the first sponsored search.

 

So, here is a question - 5 to 10 years from now, how important is the top of the funnel where the intent is very vague. If you see a world where this is irrelevant, then you should go long on any vertical specialized platform and short the search engine(s).

 

I think I explained my thinking with this part of my earlier post:

 

I don't really know the end game for the search engines. I think we are still a good 15-20 years from the internet maturing; meaning you will start to see Google's Ad revenue peak and start to decline reaching some sort of terminal level as a utility type business. That terminal level could be multiples of today's revenue though. Ultimately, I believe google will dominate internet infrastructure. Cloud, search, service provider, security provider, email, video, you name it. At that point it won't look like the growth company it is today, but will have an enormous moat like the utility sector today.

 

 

I believe there is tremendous value at the top of the funnel, and I own Google. I think in the long term Google's ad revenue will level off at some level because more value is added by more specific large niche websites. We are certainly not there yet, but I do believe there is a trend in seeing Google's CPC trending downwards since 2011 where a more niche site like Trip CPC rate has been steady despite multiple times the growth rate in mobile which Google claims is weighing on their CPC rate. 

 

I wouldn't go long vertical specialized sites, short search because there will be residual value in the upper part of the funnel even after the internet matures which could be multiples of today's search revenue. There are still 3.8B people who have never logged on to the internet and 2B who are in rapidly developing nations. The future is bright for Google and I see them as the largest internet infrastructure company in the future. To add to this, TRIP is one of the only specialized vertical companies that looks to have a high probability of being a winner. What are the others in real estate, law, finance, or insurance? I haven't seen a clear winner, but a website that adds value to potential customer and connects them with a service provider would be enormously profitable as well. 

[rishig]

I was digging around AdGooroo article that Rishig linked and found this chart interesting:

 

http://www.adgooroo.com/wp-content/uploads/2015/03/Expedia-vs-Priceline-Travel-Spend-2014_AdGooroo.jpg

 

Let's just consider Priceline for the moment because I know Rishig is familiar with them. From PCLN's 2014 Annual Report:

 

During 2014 , our total online advertising expense was approximately $2.4

billion , a substantial portion of which was spent internationally through Internet search engines (primarily Google), meta-search and travel

research services and affiliate marketing

 

My guess at TRIP's portion of Priceline's 2014 ad spend is 370M. To get this, TRIP said 46% of their revenue came from EXPE and PCLN combined. PCLN spent 2.4B and EXPE 1.3B, so I guessed PCLN spent ~65% of the 46% of TRIPS revenue - 1246M * 46% * 65% ~ 370M or 15% of PCLN's ad spend.

 

So is the AdGooroo website number just nonsense? I found this article which references PCLN's 2013 online ad spending as 90% Google:

 

  http://www.bloomberg.com/news/articles/2014-04-14/priceline-seeks-results-from-facebook-as-google-wins-ads

 

This seems a little more accurate as PCLN doesn't have a huge presence on Facebook, Twitter, or Instagram. Though I would expect for PCLN to be spending ~30% of their search engine spend on other search engines as Google only has 65% of the search market.

 

So PCLN's online advertising budget probably looks like this:  55% Google, 20% other search engines, 15% Trip, 10% all other referral sites (trivalgo, travel blogs etc).

 

 

Sure, if Google doesn't feel threatened then there's no point in chasing after TRIP. But in your earlier post you suggested TRIP might capture 50% of the OTA ad spending down the road. If so Google would lose significant market share in travel.

 

Keep in mind that in addition to the OTA spend, all the hotels individually are spending money with Google. We don't know how big that spending is, but it seems the overall exposure of Google to travel is huge.

 

If the mobile traffic and CPC stats you cited earlier are indeed a good indicator of how Google performed in travel vs. TRIP, it seems conceivable that Google was losing share fast in one of its most important lines of business.

 

Is this not the right way to think?

 

 

I would think TRIP is more attractive to the OTAs and PCLN and EXPE have shown the willingness to buy the referring sites Kayak and Trivago in the past. Though TRIP may be too big for them to buy at this point.  I looked through a Wikipedia article listing all of Google's acquisitions and outside of YouTube I didn't see any independent advertising platforms purchased to remain as a google website. Most of the time Google purchased companies to expand or enhance their core portfolio. I'm not saying Google may not be interested in TRIP but it would be uncharacteristic for them. TRIP would likely have to be acquired for at least 16B too which would be Google's largest acquisition to date. 

 

The search engines are in the aggregation of click business. As long as people go on search engines and search for generic terms such as "travel", "travel deals", "travel insurance", "travel deals to"  (the top 5 travel keywords as per https://www.wordstream.com/popular-keywords/travel-keywords), search engines will continue to monetize these clicks.

 

As far as how clickthrough rates are doing for travel keywords, see here:

https://www.adgooroo.com/resources/blog/travel-clickthrough-rates-increase-in-paid-search-post-right-rail-era/

 

The intent of people searching on search engines is different from the intent of those using TRIP or OTA. They are at different points in the funnel, and arguing one is taking market share from the other (today) doesn't make sense to me. These are complimentary in function. One could argue that TRIP could take OTA market share by IB, but saying that TRIP will take search engine market share seems a bit out there.

 

Again, this logic that as long as people remember to type tripadvisor.com in their browser means the demise of the search engine in the travel vertical is the same as saying that people remember to type Amazon.com in their browser means the demise of all product related keywords and Amazon should not be spending any money on the search engine. Totally not true. Search for a product and you will see Amazon as the first sponsored search.

 

So, here is a question - 5 to 10 years from now, how important is the top of the funnel where the intent is very vague. If you see a world where this is irrelevant, then you should go long on any vertical specialized platform and short the search engine(s).

 

I think I explained my thinking with this part of my earlier post:

 

I don't really know the end game for the search engines. I think we are still a good 15-20 years from the internet maturing; meaning you will start to see Google's Ad revenue peak and start to decline reaching some sort of terminal level as a utility type business. That terminal level could be multiples of today's revenue though. Ultimately, I believe google will dominate internet infrastructure. Cloud, search, service provider, security provider, email, video, you name it. At that point it won't look like the growth company it is today, but will have an enormous moat like the utility sector today.

 

 

I believe there is tremendous value at the top of the funnel, and I own Google. I think in the long term Google's ad revenue will level off at some level because more value is added by more specific large niche websites. We are certainly not there yet, but I do believe there is a trend in seeing Google's CPC trending downwards since 2011 where a more niche site like Trip CPC rate has been steady despite multiple times the growth rate in mobile which Google claims is weighing on their CPC rate. 

 

I wouldn't go long vertical specialized sites, short search because there will be residual value in the upper part of the funnel even after the internet matures which could be multiples of today's search revenue. There are still 3.8B people who have never logged on to the internet and 2B who are in rapidly developing nations. The future is bright for Google and I see them as the largest internet infrastructure company in the future. To add to this, TRIP is one of the only specialized vertical companies that looks to have a high probability of being a winner. What are the others in real estate, law, finance, or insurance? I haven't seen a clear winner, but a website that adds value to potential customer and connects them with a service provider would be enormously profitable as well.

 

Ross812 I think we are both saying the same thing wrt the search engine business. But sounds like JTBC is of the opinion that Trip's victory means a demise for the search revenues in travel vertical. My response was to address this.

[JBTC]

 

Ross812 I think we are both saying the same thing wrt the search engine business. But sounds like JTBC is of the opinion that Trip's victory means a demise for the search revenues in travel vertical. My response was to address this.

 

I am not sure this is an accurate summary of the views expressed so far by each of us.

 

Ross seems to think Google search will lose some market share over time to certain vertical sites such as TRIP. (But he also thinks Google is a good investment due to numerous other merits.)

 

I very much want to take a similar view, and hence was looking for evidence. The mobile traffic and CPC stats Ross cited are useful, but are also partial because the Google stats are for overall traffic, not travel/hotel only. It's entirely possible, and perhaps likely, that Google's travel stats are growing faster than its overall search business.

 

But even assuming Google's performance in travel is better than overall, it seems likely it trails TRIP quite a bit. Naturally, looking at the large gap between the two sets of stats, I was asking the question if the share loss was fast.

 

At this point we don't know for sure.

 

"A demise for search revenues"? - rishi, it would be nice of you to try not to put words in my mouth, again. Please.

 

On the very issue of long-term relative market share in travel/hotels between Google and TRIP, you didn't seem to be saying the same thing as Ross. So I am a bit confused by your statement.

 

[rishig]

 

Ross812 I think we are both saying the same thing wrt the search engine business. But sounds like JTBC is of the opinion that Trip's victory means a demise for the search revenues in travel vertical. My response was to address this.

 

I am not sure this is an accurate summary of the views expressed so far by each of us.

 

Ross seems to think Google search will lose some market share over time to certain vertical sites such as TRIP. (But he also thinks Google is a good investment due to numerous other merits.)

 

I very much want to take a similar view, and hence was looking for evidence. The mobile traffic and CPC stats Ross cited are useful, but are also partial because the Google stats are for overall traffic, not travel/hotel only. It's entirely possible, and perhaps likely, that Google's travel stats are growing faster than its overall search business.

 

But even assuming Google's performance in travel is better than overall, it seems likely it trails TRIP quite a bit. Naturally, looking at the large gap between the two sets of stats, I was asking the question if the share loss was fast.

 

At this point we don't know for sure.

 

"A demise for search revenues"? - rishi, it would be nice of you to try not to put words in my mouth, again. Please.

 

On the very issue of long-term relative market share in travel/hotels between Google and TRIP, you didn't seem to be saying the same thing as Ross. So I am a bit confused by your statement.

 

Sorry, I misunderstood. Not trying to put words, those were my words.

 

My position:

- Search engines will very likely continue to be the top of the funnel for a long time for all kinds of verticals, including travel.

- Very likely TRIP can capture a larger position in the direct booking business, but I am not sure if I am willing to pay the current valuation.

- PCLN will continue to capture travel dollars in the booking process for a long time (OTAs represent a small percentage of overall travel bookings in Asia). The dangers of disruption are overstated and I am long. Although if the valuation goes up by another 20-30% without earning power growing I will exit my position, I have already trimmed my position after the run up by 30%.

 

[thefatbaboon]

I don't really understand the travel complex well of goog, otas, trip etc. Plus hotels and how it all works. So have literally zero to add to this conversation. But I did have a question regarding user generated reviews. Which perhaps you guys could help me with.

 

I've seen some of the trip presentations in the Liberty investor days and they emphasise how there is this immense number of reviews that creates a virtuous circle. I understand that theory but my question is how many is enough.  For instance I see on my google and booking.com search nowadays that quite often there are reviews that come up when I search for restaurants and hotels. Although not as numerous as trip. And also when I go on trip I often find review that number in the many hundreds. I usually can be bothered to read more than a few.  Except when I am researching a major trip in such case I will usually use all resources trip among others for research over many days and then go about the actual booking in the cheapest way I can find. So I guess my question is how potent and enduring is this virtuous circle of hundreds of reviews and is there a sweet spot perhaps at say 50 reviews that is enough for the user to feel secure for the typical travel and food booking. A level that is probably easily achievable for Google over time. And on the other hand for the big vacation all resources are going to be considered and none considered as one-stop solution.

 

[kab60]

I don't think their strength is having 200 reviews but having RECENT reviews. Everyone knows how a good restaurent can turn into shit in no time if key personel leaves etc. Maybe less so for hotels, but their quality (cleaning, food) also tend to move around. For attractions not so much but I still think fresh reviews increases the value whether one buys electronics or plans a trip to Yucatan.

[glorysk87]

I don't really understand the travel complex well of goog, otas, trip etc. Plus hotels and how it all works. So have literally zero to add to this conversation. But I did have a question regarding user generated reviews. Which perhaps you guys could help me with.

 

I've seen some of the trip presentations in the Liberty investor days and they emphasise how there is this immense number of reviews that creates a virtuous circle. I understand that theory but my question is how many is enough.  For instance I see on my google and booking.com search nowadays that quite often there are reviews that come up when I search for restaurants and hotels. Although not as numerous as trip. And also when I go on trip I often find review that number in the many hundreds. I usually can be bothered to read more than a few.  Except when I am researching a major trip in such case I will usually use all resources trip among others for research over many days and then go about the actual booking in the cheapest way I can find. So I guess my question is how potent and enduring is this virtuous circle of hundreds of reviews and is there a sweet spot perhaps at say 50 reviews that is enough for the user to feel secure for the typical travel and food booking. A level that is probably easily achievable for Google over time. And on the other hand for the big vacation all resources are going to be considered and none considered as one-stop solution.

 

I can only give you anecdotal evidence from my own experience. But when my wife and I were researching potential honeymoon locations, we relied heavily upon TRIP.  I'm not kidding when I say we would read through at least 20 or 30 reviews for every single place we looked at.  When we narrowed it down to the final two options, we honestly read probably 100 reviews on each.  The information really is invaluable in making a decision, and it provides data points that you literally cannot get anywhere else.

 

No other site even comes close in terms of the number or the depth of the reviews. That's an asset that cannot be replaced easily or in a short amount of time.

 

Now whether TRIP's a good investment here? I'm skeptical for the time being due to valuation and model evolution.

[merkhet]

Remember, it's not just the depth of reviews. It's the depth of reviews within a relevant period of time. I'd hazard a guess that zero reviews from pre-2010 are relevant at the moment. You need a deep amount of reviews from the recent past.

[JBTC]

I don't really understand the travel complex well of goog, otas, trip etc. Plus hotels and how it all works. So have literally zero to add to this conversation. But I did have a question regarding user generated reviews. Which perhaps you guys could help me with.

 

I've seen some of the trip presentations in the Liberty investor days and they emphasise how there is this immense number of reviews that creates a virtuous circle. I understand that theory but my question is how many is enough.  For instance I see on my google and booking.com search nowadays that quite often there are reviews that come up when I search for restaurants and hotels. Although not as numerous as trip. And also when I go on trip I often find review that number in the many hundreds. I usually can be bothered to read more than a few.  Except when I am researching a major trip in such case I will usually use all resources trip among others for research over many days and then go about the actual booking in the cheapest way I can find. So I guess my question is how potent and enduring is this virtuous circle of hundreds of reviews and is there a sweet spot perhaps at say 50 reviews that is enough for the user to feel secure for the typical travel and food booking. A level that is probably easily achievable for Google over time. And on the other hand for the big vacation all resources are going to be considered and none considered as one-stop solution.

 

I agree with what's already been mentioned - the depth of the reviews, the level of details, their being recent, etc. All these attributes point to one thing - TRIP is the best, which means other sources are not.

 

For plenty of hotels TRIP has thousands of reviews. Surely no one reads them. So how much more helpful is TRIP with 500 reviews on a hotel than Booking.com with 50?

 

That may be a tough question, but likely irrelevant for most travelers.

 

This is like asking how much is Google better than Bing. Some say a lot, and some say not much. But it doesn't matter - Google is free. So there's no reason whatsoever to use Bing. The same reason applies to TRIP.

 

But more importantly, the fact that TRIP has the most authoritative customer preference data on any hotel allows it to rank all the hotels in each city. Basically, TRIP can tell you the best hotel your budget can buy. Never mind if TRIP's methodology is perfect, no one else can provide such a ranking.

 

In my opinion, the strength of TRIP's reviews does more than simply defend its market position vs. Google and OTAs. TRIP has probably weakened the brand power of the hotel industry to some degree. Prior to TRIP and its numerous reviews, I would be wary of picking a local hotel vs. a global brand. But nowadays, if I see an unknown local hotel that is highly ranked on TRIP, I am virtually certain it's a better hotel in that city than the global chains.

 

[fareastwarriors]

not sure if there's anything interesting in here....

CreditSuisse_TRIPLookingAcrosstheNear-TermInstantBookingValley_Feb_12_2016.pdf

[JBTC]

 

Again, this logic that as long as people remember to type tripadvisor.com in their browser means the demise of the search engine in the travel vertical is the same as saying that people remember to type Amazon.com in their browser means the demise of all product related keywords and Amazon should not be spending any money on the search engine. Totally not true. Search for a product and you will see Amazon as the first sponsored search.

 

 

I tried this. I typed in words for a few products - shoes, TV, children's clothing, and I barely saw any ads. Maybe it depends on where you are.

 

Any idea how much Amazon spends on the search engine each year as compared to the OTAs? Would be good to know.

 

One difference between TRIP and AMZN - TRIP is essentially a hotels company and has coverage of all the hotels you want to stay in. AMZN sells almost everything, and despite its huge store, it covers only a fraction of the products being sold in the world.

 

As a result, it's possible that Google can help shoppers locate certain products, and hence of value to AMZN and other retailers. But for travelers, most of the hotels that matter are on TRIP and OTAs' sites, Google finds nothing else.

 

In this sense, hotels may be a very special category. Again, my focus is not on if the top of the funnel is useful in the general sense - it can be. My focus is entirely on hotels (not even travel, hotels are what matters to TRIP) and whether the search engine can continue to provide value to travelers in the long-term.

 

If the value search engine provides to hotel shoppers becomes limited in the future, then the value search engine can extract will almost certainly diminish over time.

 

[glorysk87]

Remember, it's not just the depth of reviews. It's the depth of reviews within a relevant period of time. I'd hazard a guess that zero reviews from pre-2010 are relevant at the moment. You need a deep amount of reviews from the recent past.

 

Very good point, and something that I forgot to mention.  There were numerous resorts we researched that on the surface looked really good, but if you read through the history of the reviews you could see a very clear pattern of decline (sometimes due to management changes, sometimes due to other factors).  So again, in-depth and time-relevant reviews were highly useful for us. And again that's something you can't get anywhere else.

[KCLarkin]

not sure if there's anything interesting in here....

 

Thank you, very helpful. Assuming this is representative of sell-side sentiment, they are expecting moderately high revenue growth but significant operating leverage as the IB investment phase winds down.

 

They are modelling adj. operating margins going from 27.4% to 45.8% in 2021. As discussed above, I'm sceptical that TRIP will get as much leverage from sales and marketing as Credit Suisse is modelling. But I think their WACC and terminal growth rate are too conservative so their fair value estimate of $80 seems reasonable.

[WneverLOSE]

Hi, I am trying to understand why TRIP Margins have gone down so much and I am having some difficulties understanding it.

 

 

While Revenue has been growing at 24.8% for the last 9 years, Net income has only grown at 16%.

Net margins have gone from 29% to 13%.

 

Anyone has any thoughts about the subject ? is it that the business is becoming less competitive ? or is it just large amount of future investments that are eating away from the reported net income (and if so, what is your idea of normalized expenses such as R&D and SG&A) ?

 

 

[muscleman]

Hi, I am trying to understand why TRIP Margins have gone down so much and I am having some difficulties understanding it.

 

 

While Revenue has been growing at 24.8% for the last 9 years, Net income has only grown at 16%.

Net margins have gone from 29% to 13%.

 

Anyone has any thoughts about the subject ? is it that the business is becoming less competitive ? or is it just large amount of future investments that are eating away from the reported net income (and if so, what is your idea of normalized expenses such as R&D and SG&A) ?

 

It is also puzzling to me. With Instant Booking, their margin is supposed to go up instead of down.

 

 

[muscleman]

Does anyone know the reason for the Hotel revenue to go down so much YoY?

 

They said:

"In our Hotel segment, we saw significant revenue growth deceleration due to our global instant booking launch, with a corresponding impact on EBITDA. Both were expected and communicated in February."

 

But I don't really find much info in their 2015 Q4 conference call transcript.

I assume with IB, they are supposed to get a bigger slice of the pie, so revenue should only increase than descrease. I know they now book revenue when travellers stay instead of when they book, so revenue recognition is delayed, but they said in average it is only 3-5 weeks delayed.

 

Note that they used the term "revenue growth deceleration" but in fact it is actually a decline instead of deceleration.

 

[prevalou]

Does anyone know the reason for the Hotel revenue to go down so much YoY?

 

They said:

"In our Hotel segment, we saw significant revenue growth deceleration due to our global instant booking launch, with a corresponding impact on EBITDA. Both were expected and communicated in February."

 

But I don't really find much info in their 2015 Q4 conference call transcript.

I assume with IB, they are supposed to get a bigger slice of the pie, so revenue should only increase than descrease. I know they now book revenue when travellers stay instead of when they book, so revenue recognition is delayed, but they said in average it is only 3-5 weeks delayed.

 

Note that they used the term "revenue growth deceleration" but in fact it is actually a decline instead of deceleration.

 

Maybe TripAdvisor has to pay Priceline to make instant booking on its site

[Phaceliacapital]

From Priceline 10K:

 

For example, TripAdvisor facilitates hotel reservations on its transaction websites Tingo and Jetsetter and, with respect to some accommodations, allows consumers to make a reservation while staying on TripAdvisor through its "Instant Booking" offering. Instant Booking now includes participation from six out of the top 10 global hotel brands, including Marriott International, Hyatt Hotels and Best Western International. We recently agreed to participate in "Instant Booking," and we do not yet know how this participation will affect our business. For example, while we expect to benefit from incremental business generated through "Instant Booking," participation could cannibalize business that would otherwise come to us through other ad offerings on TripAdvisor, directly (including after a consumer first visits TripAdvisor) or through other channels, some of which may be more profitable to us than reservations generated through "Instant Booking." Other meta-search providers may also offer direct booking services with travel service providers, which may lead to more consumers booking directly with a travel service provider rather than an OTC. For example, in September 2015 Google announced the discontinuation of its Hotel Finder meta-search service in favor of integrating hotels directly into search results and encouraging users to book hotel reservations directly through Google's "Book on Google" service, which it is now expanding from mobile phones to both desktops and tablets. To the extent consumers book travel services through a service such as Google's "Book on Google," a meta-search website or directly with a travel service provider after visiting a meta-search website or meta-search utility on a traditional search engine without using an OTC like us, or if meta-search services limit our participation within their search results or evolve into more traditional OTCs, we may need to increase our advertising or other customer acquisition costs to maintain or grow our reservation bookings and our business and results of operations could be adversely affected.