Please ensure Javascript is enabled for purposes of website accessibility

Analysts Duel Over TripAdvisor: What You Need to Know

By Rich Smith – Updated May 16, 2018 at 12:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Macquarie vs. Guggenheim: Which banker should you believe?

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Shares of TripAdvisor (TRIP 2.06%) are in a funk.

Particularly strong in hotel and destination reviews, TripAdvisor remains the most popular travel-related website in the United States by search traffic, scoring an average of 35 million site visits per month last year. But you wouldn't know it from the stock price.

From a high north of $110 four years ago, TripAdvisor shares have taken a trip off a cliff, losing more than half their value over the last four years, and recently falling as low as $38 (before last week's bounce). This morning, they may fall more -- or rise -- depending on how investors react to two new ratings from Wall Street.

Here's what you need to know.

Guggenheim grouses

Let's start with the bad news. This morning, analysts at financial services company Guggenheim cut their rating on TripAdvisor stock from neutral to sell, reports StreetInsider.com (subscription required).

Guggenheim cites three primary reasons for pessimism:

First, online travel agencies (OTAs) in general have begun focusing on beefing up their profit margins at the expense of maximizing sales of hotel rooms, period. This is depressing the cost per click (CPC) that TripAdvisor can charge for ads placed on its website, could hurt its revenue, and thus threatens to hurt the company's growth rate.

Two people leaning on edge of infinity pool with palm trees in the background

Image source: Getty Images.

Second, TripAdvisor in particular is trying to improve its profit margins by cutting spending on its own advertising -- but at the same time as its rivals are spending more. Meanwhile, Google (the Alphabet subsidiary) is angling to capture more of the travel review business, further pressuring TripAdvisor in the process.

Third, TripAdvisor stock that suffered in reaction to the above trends has already rallied 25% over the past week, with the result being that the shares now look expensive to Guggenheim. The analyst calls TripAdvisor's valuation (now 4.2 times trailing sales) "aggressive," especially in light of the company's lack of profits and "no history of growth."

Macquarie responds

Now here's the counterpoint: At the same time as Guggenheim was downgrading TripAdvisor, Australian banker Macquarie was upgrading the stock -- to outperform.

Admitting that competition from Google and spending cuts by OTAs will challenge TripAdvisor, Macquarie nonetheless likes TripAdvisor's decision to lower advertising spending to maintain its profit margins, and believes we could see costs cut "materially," boosting profits over the next two quarters. In fact, Macquarie predicts 2018 will see TripAdvisor grow its profit margins for the first time since 2011, according to a write-up on TheFly.com.

Based on this, Macquarie is predicting that TripAdvisor will report earnings before interest, taxes, depreciation, and amortization of $408 million this year -- up more than 20% from last year -- and $466 million in 2019 (or 14% growth).

The analyst has therefore reversed its earlier underperform rating to outperform, and nearly doubled its price target on TripAdvisor stock to $60 a share.

What the numbers say

So who's right in this debate -- Guggenheim the bear, or Macquarie the bull? Let's take a quick look at what TripAdvisor itself had to say in its earnings report last week.

Reporting Q1 earnings last Tuesday, TripAdvisor noted that its quarterly sales grew 2%, hurt largely by a decline in hotel ad revenue. Its profits declined 56%, to $0.04 per share. While objectively unimpressive, TripAdvisor Chief Financial Officer Ernst Teunissen said these results were still "tracking well" with what the company had planned to accomplish, and TripAdvisor is actually feeling "more positive about our 2018 profitability outlook."

Management did not, however, say what that "profitability outlook" is exactly. Rather, it expressed only a vague hope that TripAdvisor will "deliver year-over-year consolidated adjusted [earnings] growth in 2018," and said it's feeling "incrementally positive about our revenue prospects."

While vague, that guidance doesn't seem to tally particularly well with what most of Wall Street is hoping TripAdvisor will produce this year, though: GAAP profits (not mere pro forma) of $0.52 per share and revenue growth of 5%, according to data from S&P Global Market Intelligence.

Meanwhile, TripAdvisor stock is selling for the aforementioned 4.2 times trailing sales and more than 30 times trailing free cash flow. With analysts on average predicting the company will grow profits at only about 12% annually over the next five years, I'd be very leery of following Macquarie's advice and buying TripAdvisor stock after last week's run-up. Guggenheim's advice to sell the stock seems the safer call to me.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Rich Smith owns shares of GOOG. The Motley Fool owns shares of and recommends GOOGL, GOOG, and TripAdvisor. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

TripAdvisor, Inc. Stock Quote
TripAdvisor, Inc.
TRIP
$22.29 (2.06%) $0.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.