Shares of TripAdvisor (Nasdaq: TRIP ) hit a 52-week high yesterday. Let's take a look at how the company got there to find out whether clear skies remain on the horizon.
How it got here
The travel sector's had its ups and downs since TripAdvisor's spinoff from former parent Expedia (Nasdaq: EXPE ) . TripAdvisor and industry leader priceline.com (Nasdaq: PCLN ) have posted impressive gains, but Travelzoo (Nasdaq: TZOO ) has floundered. Expedia, which doesn't correctly display on the chart below due to a stock split shortly after TripAdvisor's IPO, has posted impressive gains of its own, nearly matching its former subsidiary.
TRIP Total Return Price data by YCharts
TripAdvisor's success stems largely from its post-IPO earnings successes, with two straight quarters of impressive growth buoying investor hopes. TripAdvisor, sometimes called the Yelp (Nasdaq: YELP ) of travel, has been doing a great job of driving interested users to relevant travel packages, picking up tasty advertising and referral revenues along the way. It's certainly done better than Yelp itself, which has posted widening losses as it works to expand its reach.
What you need to know
TripAdvisor's fast growth has led to one of the higher valuations in the industry, but are such levels sustainable? Let's take a look at a few important numbers to get a better picture of the company's future.
Price to Free Cash Flow
Net Margin (TTM)
3-Year Annualized Earnings Growth
TripAdvisor's got a nice net margin, but its historical earnings growth can't hold a candle to priceline's -- or to Travelzoo's, for that matter. Fool analyst Jim Royal bought TripAdvisor's shares back in December for his real-money portfolio, shortly after its spinoff. But heady growth rates made him reconsider holding the stock for the long haul, and he divested those shares in May.
If the company can keep beating estimates, Jim may regret letting go, since there aren't any direct competitors with TripAdvisor's reach and potential. Growth in priceline's bottom line doesn't hurt TripAdvisor, as long as it's priceline's bargains that TripAdvisor's users utilize. Still, at its current levels, a mediocre quarter might spark a big pullback. Expedia and Travelzoo, with more reasonable valuations, may have more long-term upside, particularly if Travelzoo's brisk earnings growth doesn't grind to a halt.
Where does TripAdvisor go from here? That will depend on how engaged travelers become in their research process. Summer travel plans could lead to a second-half rally, but consumers may be waiting out weakening economies around the world to make sure their money buys more fun after other currencies weaken. Travel companies may have Athens promotions socked away, waiting for an eventual Greek exit to make an Agean vacation much more appealing.
The Motley Fool's CAPS community has given TripAdvisor a three-star rating, with 85% of CAPS players expecting the stock to continue its 52-week trend higher.
Interested in tracking this stock as it continues on its path? Add TripAdvisor to your Watchlist now for all the news we Fools can find, delivered to your inbox as it happens. If you're looking for another stock with huge potential, The Motley Fool's got a multibagger for you. Find out about the stock Fool co-founder David Gardner's personally selected for Fool insiders in our free report on "The Next Rule-Breaking Multibagger." This opportunity won't last long, so click here to get the free information you need to buy your next great stock today.
Editor's note: A previous version of this article contained a chart that did not appropriately account for the impact of Expedia's 1-for-2 reverse stock split. The Fool regrets the error.