Growing for free

TripAdvisor-logo

TripAdvisor is the world’s largest travel site by number of users. In any given month there are about 350 million users that use TripAdvisor websites through their desktop or mobile app.

Today, TripAdvisor is a wide collection of websites such as TripAdvisor.com, viator.com, thefork.com and many other smaller brands.

In February 2000, TripAdvisor was founded by Stephen Kaufer, Langley Steinert, and several others. Kaufer says the original idea wasn’t a user generated social media site to swap reviews. Rather, “We started as a site where we were focused more on those official words from guidebooks or newspapers or magazines. We also had a button in the very beginning that said, “Visitors add your own review”, and boy, did that just take off. Pretty soon the number of average consumer reviews far surpassed the number of ‘professional reviews’. That is when the site really turned into this collection of what the normal traveler was saying wherever they were going.”

When I say that TRIP is “Growing for free” I mean it in two ways :

  1. TripAdvisor unique UGC (User Generated Content) model allows then to retain huge amount of valuable information with very little cost. Any other competitor such as booking.com or hotels.com have structural disadvantage compered to TripAdvisor. TripAdvisor has a two sided network effect. As it has more reviews (customers) more people are inclined to check their website for the best hotels. On the other hand, as more users are on TripAdvisor platform, advertisers such as hotels and OTA’s see TripAdvisor as a more valuable partner for generating leads for their website.
  2. The stock price currently attribute very little growth for the company and it is fairly valued on a very modest growth assumptions, meaning that all future growth in the business should flow right into the stock price.

https://widget.similarweb.com/sources/tripadvisor.com
(How customers are acquired, TripAdvisor VS Booking.com)

TripAdvisor is currently on the process of transforming part of it’s metasearch business into instant booking through their website. TripAdvisor already struck the major deals with large hotel chain and the priceline group that allows them to offer customers to book on TripAdvisor native website and app with only a small printing in the bottom saying that this transaction was made using booking.com or any other OTA or hotel chain.

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This process is quite complicated but the major points are that each participant (such as hotels and OTA’s) bid for being selected as the partner that fulfill the hotel booking using TripAdvisor’s “Instant Booking” feature. This change in business model should provide TripAdvisor better monetization of customers and should raise their ARPU.

Instant booking is looking quite promising at the moment. After a rough start, TripAdvisor was able to get the major critical contract with large hotel chains and OTA’s (since 80% of all bookings are made on 20% of the most popular properties all the other properties don’t have much choice regarding taking part in TripAdvisor’s “Instant booking” feature) and they are now on the process for rolling it worldwide.

cycle

TripAdvisor always seeks to strengthen it moat and they do so by making their ecosystem more valuable throughout the travel lifecycle. When travelers are researching for hotels, the will use TripAdvisor.com to find the best hotels and the best price. When they are ready to book, some of them will book on TripAdvisor since it is more convenient (especially on mobile since you don’t have to exit the app and book through mobile web browser) and they are already familiar with the website (and this is purely incremental sales since using the older business model they didn’t had a way to monetize those shoppers), when they are on the trip the will use viator.com to book all their attractions and use thefork.com to find the best restaurants to visit. After the trip, those happy traveler come to TripAdvisor and share their experiences and photos on all of TripAdvisors websites.cycle2

TripAdvisor hotel segment generates ~40% EBITDA margins and their CAPEX is 5% of sales. This leaves us with 35% pre-tax owners earning margin. At today’s price of 6 times sales you are paying around 17 times that amount. This seems quite reasonable when taking into account that the 5% CAPEX is probable a lot higher then regular Maintenance CAPEX and the fact that TripAdvisors others segments are growing at 100%+ rate. I believe a rational buyer would happily pay 12 times after tax owners earning for this high quality business with modest revenue growth (4% – 8%).