3 Reasons to Buy TripAdvisor After Earnings

TripAdvisor (Nasdaq: TRIP  ) had a good day last Friday. Shares of the online travel research site jumped 20% after the company announced strong Q3 earnings and doubled down on an ambitious forecast for the year.

But if you're worried you may have missed the boat on the company after a pop like that, take heart! There are a couple of reasons to believe that TripAdvisor's outperformance is only getting started.

First, let's dig into the earnings report that led to all the investor enthusiasm. Here are the highlights:

  • Revenue hit $213 million, up 18% from the year-ago quarter.
  • Earnings were up 9%, to $0.41 a share.
  • The company averaged 57 million monthly visitors, up from 54 million last quarter.
  • Mobile device access soared, up over 130%.

Click-based advertising revenue, TripAdvisor's bread and butter, reached $170 million in the quarter. The company saw both of its secondary income sources, display-based advertising and subscription services, rise over the last three months, too.

All in all, TripAdvisor is making strides in wresting away more search dollars from Google (Nasdaq: GOOG  ) . By confining a growing number of travel-related queries to its own ecosystem of apps and websites, Trip is boxing out the gorilla of search -- and minting money in the process.

But Google isn't ignoring the competition. The company has a trio of its own services -- Google Places, Google Flights, and Hotel Finder -- aimed directly at TripAdvisor's users. And because the online travel space touches on local businesses from restaurants to hotels, it's hard to see Google voluntarily ceding that market to anyone.

Still, there are a couple of trends that look set to power future growth for TripAdvisor, even against such an entrenched competitor.

1. Going global
TripAdvisor reported a strong boost in international sales in Q3. U.S. revenue dropped to 50% of TripAdvisor's revenue pie, from 57% at the start of last year. While that's moving in the right direction, the company still has plenty of room to expand toward the 78% typically booked by (Nasdaq: PCLN  ) .

International markets remain a big opportunity for TripAdvisor to tap. For evidence of that, consider what fellow online travel company Orbitz (NYSE: OWW  ) had to say about the trend this summer:

We believe the domestic online travel market has matured. However, internationally, the online travel industry continues to benefit from increasing Internet usage rates and growing acceptance of online booking. As a result, international growth rates for the online travel industry have outpaced, and we expect will continue to outpace, domestic growth rates for online travel. 

2. Getting social
TripAdvisor can also look forward to more engagement through Facebook (Nasdaq: FB  ) to lift usage numbers. The company had 34 million monthly visitors from its Facebook app, making it a strong acquisition channel for new members.

While TripAdvisor's experiment with Facebook integration is in its early stages, initial signs are encouraging. CEO Stephen Kaufer had this to say about the success of the Facebook app so far: "Because of what those folks are doing with the app, it's generating invitations to other users, it's generating status feeds...which in turn are generating a lot more members for us for free, [that] we're not having to pay to acquire."

Social sharing of travel recommendations is a natural fit for a travel research site like TripAdvisor. And that kind of organic growth has the potential to drive marketing costs down and boost profitability in the process.

3. Growing cheaply
We're seeing some evidence of that cheap growth already. TripAdvisor is getting more bang for its marketing buck. Selling and marketing expenses fell to 31% of sales in the quarter, from 33% in the year-ago quarter.

That's important because TripAdvisor's model depends on user-generated content from a growing mass of travelers. Being able to expand that ecosystem efficiently is key to the company's success. Trip's marketing costs peaked at 37% of sales in Q4 of last year and tends to reach a seasonal high during the winter months, so it's bound to tick up next quarter. Still, that metric is worth watching closely in the quarters ahead for signs of the robustness of the company's growth model.

And as an investment, TripAdvisor still looks like a solid buy, even after last week's pop. At a P/E ratio of 27, shares are valued at a premium to -- but still comparable with -- Priceline and Expedia's 24 and 23 times earnings, respectively. And Trip's shares are 20% below where they were in late July. So if you were thinking about investing in the stock, I wouldn't let Friday's price action keep you on the sidelines.

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