Tripadvisor: Appears Fully Valued After Takeover News (NASDAQ:TRIP)

Tripadvisor (NASDAQ:TRIP) is a leading global travel review and price comparison platform founded in 2000 as part of Expedia. It completed a spin off and became publicly traded in 2011.

I have covered TRIP in the past in 2020, when I assigned it a neutral rating due to my doubt about its strategy. While I was proven wrong at that time, TRIP’s all-time share performance still has been underwhelming overall.

TRIP started trading in NASDAQ in 2011 at a price of $27.9. It would then perform relatively well and reached an all-time high of over $110 in 2014. However, momentum has faded away since then, highlighted by the downtrend into the next ten years. TRIP has been volatile over the past five years, with the stock trading as high as $60 in mid 2021 post COVID 19, but also hitting its all-time low of $14.3 towards the end of 2023. At that level, TRIP even traded lower than its 2020’s low of $15.8 during COVID 19. YTD, though, TRIP seems to have been trending higher, with the stock currently trading at $28.6, up 35.6% YTD.

I maintain my coverage with a neutral rating. My 1-year price target of $29 presents a merely 2% upside from the current price of $28.

Financial Reviews

Fundamentals are decent overall. Revenue has been back to pre-COVID level, GAAP profitability and operating cash flow (OCF) generation have reached break even since last year, though currently are still not at the pre-COVID level.

In FY 2023, TRIP generated a revenue of $1.79 billion, a 20% growth YoY, surpassing pre-COVID revenue of $1.56 billion in FY 2019. TRIP has also delivered a GAAP net margin of around 1% level since 2022. Meanwhile, TRIP also generated $635 million of OCF over the past two years, which has contributed to the steady liquidity level of over $1 billion within the same period.

Cash level has been steady even as TRIP has been consistently spending over $50 million each year for technology development and occasionally making share repurchases and debt repayments. Overall, balance sheet management has been relatively decent. In addition to $1 billion of liquidity, debt-to-equity (DE) ratio has also been in and around 1x, a healthy level.

Catalyst

Despite normalization of growth due to the pent-up travel demand in FY 2023, I believe TRIP is still in a good position to maintain decent double-digit growth with potential margin expansions, in my view.

A particular catalyst for growth here would be the continued strength in TRIP’s tour marketplace business, Viator. While TRIP’s core Tripadvisor business only grew 7% YoY in FY 2023, it continues to make up less and less of the overall business as it matures. Meanwhile, Viator’s share of the business has been increasing significantly over the years. Having made up 38% of the business in FY 2023 and still clocked in 49% YoY growth, I believe there is a good possibility for Viator to make up half of TRIP’s business in the next few years. Effectively, TRIP should be able to maintain a strong double-digit growth as the share of the higher-growth business, Viator, increases. A key growth lever that TRIP could pull, in my opinion, would be category expansion for its tour offerings, as commented by the CEO in the Q4 earnings call:

But at Tripadvisor, there is an opportunity to bring in more inventory to think about matching by geography, by category and maybe even categories that Viator doesn’t represent today that we can find elsewhere is something we can do. And that will drive significant upside for a long time to come.

Source: Q4 earnings call.

In my view, aside from the better selections that could increase repeat purchases, it should also improve TRIP’s long-tail SEO strategy.

In addition, all of TRIP’s businesses outside of Tripadvisor are also improving from a profitability standpoint. Viator did not only reach breakeven in Q4 2023, but also delivered $15 million of adjusted EBITDA, in contrast to last year. The same time last year, Viator still realized $3 million of adjusted EBITDA loss. The other business, TheFork, has also seen gradual improvements in its profitability on QoQ basis and reached a breakeven in Q4 2023. As such, despite TheFork losing $14 million of adjusted EBITDA for the full year, it is in a good position to narrow it in 2024 if TRIP can maintain the improvement.

In my opinion, there is also room for more profit margin expansions, driven by more efforts towards optimizing its organic SEO strategy. As commented by the CFO in Q4 earnings call, organic strategy appears to have already created considerable value in Q4, suggesting that there is a good chance for replicating the success into the next few quarters:

Yes. Yes. So just to unpack on both platforms, I think the leverage is really across brand Tripadvisor and Viator. I already talked about Viator on the last answer. Brand Tripadvisor, we just saw a very healthy free channel mix in the quarter. That very much impacts that leverage result. Just credit to the teams at brand Tripadvisor who really work every day on optimizing all our channels, but particularly on the free channels, whether it’s CRM, SEO, or other direct channels. We continue to see good results there. We saw a nice pricing versus our expectations and certainly good pricing on a year-over-year basis.

Source: Q4 earnings call.

In Viator, for instance, organic search only drives 36% of the overall traffic. In contrast, organic search drives over half of the overall traffic in Klook, its competitor. Furthermore, Klook also appears to have scaled back on paid search, with only 7% traffic coming from that channel. Therefore, there could be room for margin expansion upside here. As TRIP continues to optimize its channel mix, there could be an opportunity for Viator to reduce spend on paid ads and increase organic SEO activities.

Risk

For now, I believe risk remains minimal. Aside from the potential heightened geopolitical tension in the Middle East, the recent potential Apollo takeover news may also create downside risk, in my view. While I believe that the takeover could be rewarding for shareholders, the temporary market reaction to the news may result in higher near term volatility.

In mid February, many analysts projected TRIP to be fairly valued at $25 per share or higher, effectively resulting in the stock trading higher as soon as the news was released. At $28 today, TRIP is trading exactly at the high-end range of Wells Fargo’s projection. As such, with no guarantee of takeover happening and the news being fully priced in, there is a possibility for TRIP to see selling pressure if the takeover does not happen.

Valuation / Pricing

My target price for TRIP is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:

1. Bull scenario (70% probability) assumptions – I expect TRIP to achieve an FY 2024 revenue of $2.06 billion, a 15% growth, in line with the market’s estimate. I assign TRIP a forward P/S of 2.3x, where TRIP is trading today post takeover news that also implies a share price appreciation to $33. In this scenario, I would expect the continued strong performance in Viator and positive takeover development to drive share performance.

2. Bear scenario (30% probability) assumptions – TRIP to deliver FY 2024 revenue of $1.89 billion, slightly missing the low-end range of the market’s estimate. In this scenario, I expect TRIP to see a correction to $21, given the significantly decelerating growth.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $29 per share, presenting a potential upside of merely 2% from the current level. At this point, I would give the stock a neutral rating.

Conclusion

TRIP seems to have decent business fundamentals and rooms for further operational improvements, in addition to the relatively minimal risk factors at present. However, the recent takeover news has pushed the share price up considerably, making it a bit expensive today. My 1-year price target of $29 suggests a merely 2% upside from the current trading price of $28. I would advise investors to stay on the sidelines and monitor not only further business progress but also the takeover development into the next few quarters before dipping in.