Spin-offs typically create value for shareholders through more nimble, focused companies. With direct equity these businesses are able to attract and more appropriately incentivise staff. This is capitalism at its very best. I am bullish TripAdvisor (TRIP) with 50 million unique monthly visitors it is the world's largest online travel company. TRIP was spun off from Expedia (EXPE) late last year. The spinoff had a unique angle as TRIPs customers are EXPEs competitors. As a result the marketing spend from competitors such as Priceline (PCLN), Orbitz and Travelocity was muted. At the end of the day they knew any money spent with TRIP was going into a competitor’s pocket. Now the companies are completely independent of each other. I believe this spells an opportunity for investors.
TRIP has 60 million reviews on 550,000 properties and 900,000 restaurants and attractions. This compares to 13.9 million reviews on Booking.com as at May 2012. At the moment TRIP is only monetising its hotel customers but users are also reviewing restaurants and attractions. This suggests plenty of future revenue opportunities. According to a 2011 International Data Corporation report the global travel industry represents half of all global e-Commerce transactions, yet only 16% of travel advertising is spent online. TRIP also has solid international growth potential with 75% of usage overseas versus 40% of revenue.
TRIP's largest customer as at December 31st, 2011 was EXPE with 33% of revenue. What has caused some concern with investors was a disclosure in the 10K (under risk factors) with TRIP expecting EXPE to lower its cost per click pricing by 10-15% from 2011 levels. Leading to concerns of a long term reduction in EXPE spend over time. However a read of TRIPs Form S-4/A Registration Statement on page 68 allays some of these fears with the disclosure that the Chairman Barry Diller (3.8 million options) and CEO Dara Khosrowshahi (800,000 restricted stock units) will each receive half TRIP and half EXPE stock. This aligns top EXPE management with the performance of TRIP and suggests that marketing spend will not decline as much as some bears expect.
Another customer accounts for 16% of revenues (approx $102 million). The customer has not been disclosed. But given the size in our opinion, expect it to be PCLN the owner of booking.com. According to the latest 10K PCLNs online advertising spend was $919 million with 11% of online advertising spent on TRIP. This compares favorably to EXPE's combined online/offline advertising spend of $796 million with 26.5% spent on TRIP. This suggests some upside with PCLN, a much larger potential customer.
Customer concentration is the main risk, with TRIP managing it by actively growing customers outside of the online travel aggregators. These other customers are the actual hotels with TRIP charging properties directly for business listings, such as displaying phone numbers and emails on the TRIP website. These subscription fees account for 8% of revenue and have grown 76% over pcp. According to the 10K only 6% of current hotels have a business listing, suggesting a lot of potential for a more stable and recurring profit stream.
Historically TRIP relied on the wisdom of crowds to help users make decisions. Recently TRIP has expanded to specifically include the wisdom of friends. Users can see reviews from friends followed by friends of friends. Details can be found in Facebooks (FB) S1 IPO registration document under examples of platform integrated websites. By tapping FB social data TRIP connects users to shared content about where they and their friends have travelled and where they might possibly travel in the future. In our opinion, this information could open many possibilities. It could allow TRIP to give personalised recommendations in the future based on similar profiles and where users friends have been.
Do not just take our word for a bullish view on TRIP, with the shares making new highs another wisdom of crowds i.e. the stockmarket is giving TRIP a 5 star review. Make sure you check in and have a look.
Disclosure: Decisive is long TRIP
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
