Are TripAdvisor Shares a Better Investment Than Priceline Shares?

TripAdvisor (NASDAQ: TRIP  ) is the world's largest travel review company, while Priceline (NASDAQ: PCLN  ) is the world's biggest online travel agency, or OTA. TripAdvisor was once a division of Expedia (NASDAQ: EXPE  ) , but was spun off in December 2011. 

Two years down later, it's likely that Expedia is suffering from some form of post-spinoff remorse. After all, TripAdvisor has become such a successful operation, and its share price has climbed so much, that the company is now actually bigger than its former parent company (TripAdvisor has a market cap of $13.2 billion, compared to Expedia's $9.2 billion). Priceline has also seen phenomenal growth in recent times, and its share gains have outpaced those of its peers in the last ten months.

But, unlike TripAdvisor shares, the valuation of Priceline shares remains quite reasonable compared to its closest competitor, Expedia. TripAdvisor shares sport a forward P/E ratio of 50.96, more than double Priceline's forward P/E ratio of 24.34. It's only natural to wonder whether there is any reasonable justification for TripAdvisor's pricey valuation, and if it is still a sound investment.

Different business models
Although TripAdvisor operates as a travel company, it sports a very different business model from Priceline. TripAdvisor, as the name suggest, is a travel advisory site where people log in and read other people's reviews of hotels, vacation rentals, and other types of travel experiences. Users can make decisions based on what they read, then click through to OTAs such as Priceline and Expedia to do their booking. TripAdvisor, therefore, acts as a facilitator for these OTAs.

Travel agencies pay TripAdvisor to place banner ads on its site. They also pay the company a fee to post their ads on its site. In fiscal 2013, the company collected revenue from clicks and banner ads, as well as subscription services totaling $944.7 million. Its net income came in at $205.4 million. Priceline and Expedia contribute a good chunk of TripAdvisor's revenue.

There are other relatively less-popular travel advisory sites such as Yelp, Google Places, TravelPost, Trivago, Zoover, VibeAgent, and others. But, none comes close to TripAdvisor in terms of sheer popularity with consumers. TripAdvisor users have logged more than 150 million reviews on the site to-date. The site also receives 260 million unique monthly visitors.

The huge number of reviews on its site has given TripAdvisor a large moat in the industry, and a huge leg up on its competition. Users tend to trust a hotel's reviews more if, say, 70 or 80 people have posted reviews than if only10 or 12 people have reviewed it. Therefore, the more people post reviews on TripAdvisor, the more valuable the site becomes to both users and marketers alike. Although the site has come under scrutiny by the Advertising Standards Agency regarding the authenticity of some of its reviews, a survey conducted by TripAdvisor revealed that 98% of its users trust the reviews as genuine. Given its popularity, it seems as if other travel advisory sites will have a slog trying to catch up with it.

What makes Priceline tick?
Priceline is largely a foreign hotel booking platform that relies heavily on Booking.com, a company it bought back in 2005 in what now appears to be incredible foresight. Booking.com is a Dutch company that specializes in European hotel reservations.

The European travel industry is a lot more fragmented than the U.S. market. Hotels rely more heavily on travel agencies such as Priceline to connect them with travelers than U.S. hotels do. Priceline gets 85% of its revenue and 94% of its operating income from international markets. In sharp contrast, its main rival, Expedia, gets most of its revenue from the U.S. market.

Priceline has been reaping huge benefits of scale. According to Paul Greene, a T. Rowe Price fund manager, Priceline not only spends less than both Expedia and Orbitz to attract online traffic, but also manages to convert a higher percentage of its traffic into actual bookings. Many hotels that seek to sell their distressed inventory (unsold rooms) prefer listing with Priceline.com because they know many customers are likely to look there. This is a typical case where success breeds even more success.

Priceline's operations are more efficient than those of its competitors. The company makes about $823,431 revenue per employee from each of its 9,500 employees. Expedia only manages to make $644,598, while Orbitz WorldWide makes $354,740.

That kind of efficiency helps the company realize a much higher net profit margin than its peers.

Foolish bottom line
Both Trip Advisor and Priceline are the undisputed leaders in their respective industries. As more people continue using TripAdvisor to post travel reviews, the site becomes even more valuable and attracts more ad revenue. Although Priceline occupies a large moat for OTAs, TripAdvisor, arguably, occupies an even bigger one, hence the pricey valuation of its shares.

In a broad market correction, however, TripAdvisor shares would likely take a bigger hit than Priceline shares due to their steep valuation. It is, therefore, a good idea to have a well-balanced mix of both stocks in your portfolio to get a measure of protection in case the market takes a downturn.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2895994, ~/Articles/ArticleHandler.aspx, 12/19/2014 10:54:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement