It's not everyday that businesses can boast market opportunities that top $1 trillion. But in this episode of Industry Focus: Consumer Goods, Vincent Shen and senior Motley Fool contributor Asit Sharma cover two companies that can do exactly that: Booking Holdings (NASDAQ:BKNG) and TripAdvisor (NASDAQ:TRIP).

However, their approaches to the large and fast-growing travel industry are quite different. Find out how each company makes its money, major risks, and which of the two is better-positioned long term.

The cast also discusses another side of the consumer goods market: Funko (NASDAQ:FNKO) and its recent IPO.

A full transcript follows the video.

This video was recorded on June 19, 2018.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, and we're in the Fool HQ studio today, pre-recording this show for Tuesday, June 19th. 

The summer solstice is almost here, meaning vacations and travel activity are already starting to pick up. For this season, we're going to look at the latest news from two online travel companies, Booking Holdings, ticker BKNG, and TripAdvisor, ticker TRIP.

Joining me today is senior Motley Fool contributor, Asit Sharma, who's calling in to the Fool HQ studio via Skype. Hey, Asit! Thanks for hopping on with us!

Asit Sharma: Hey, Vince! Hello, listeners! I hope everyone's summer is getting off to a fantastic start.

Shen: I know mine is. I'm pretty pumped to talk about these two companies. This is a really interesting space. 

But before we get into our main topic, I know that you wanted to briefly cover Funko, ticker FNKO. This is another company from the IPO class of 2017, but it's not one that we spoke about during our recent IPO update episode from a few weeks ago. Funko is a small-cap, currently trading with a market capitalization of about $550 million. The company priced its IPO last November at $12 per share. It's experienced some rocky trading since then. It's only recently recovered to above $10 per share in the past month or so. 

The company makes pop culture-inspired consumer products. Take some of your favorite movie or video game characters or musicians or athletes, and Funko basically turns them into figurines, plush toys, apparel, and other fun items. As part of its business, the company has a lot of licensing agreements with different intellectual properties, including all 15 of the highest-grossing movie franchises in history. 

Last year, Funko generated $516 million of revenue, and that was 21% growth over the prior year. Its primary product category has historically been these figures, but it's starting to branch out into different product categories. I'll stop there, Asit. First, I wanted to ask you how Funko ended up on your radar, because it's a smaller company, not one that would necessarily come up in terms of some of the screens that we do and things like that. I'm curious how you heard of it.

Sharma: Sure, Vince. I want to credit one of our dozens of loyal listeners on this one. This is Brandon Stokes, who's actually a friend of mine. He is a young investor, and invests in very forward-looking companies. We have coffee every few months and sit down and talk about stocks, and he brought this to my attention. Brandon bought Funko after its IPO and cued me into this company. I realized much later that I did know about Funko, because I have three teenage sons -- listeners, you've probably heard me talk about them from time to time -- and I realized we had a couple of Star Wars bobbleheads around the house that emanate from this company. 

That's how I found out about it. I did some research, and I think it's very interesting, as well, Vince. I really love the idea of intellectual property. We've talked in the past about so many franchise-style companies. Marriott is one that we've discussed in terms of having strong intellectual property and then licensing that, letting other people do the hard work. 

Funko is on the flip side of that model. It actively seeks out licenses from major companies. As you named, Disney is one, for example. Then, they create whatever the ebb and flow of pop culture is alighting on at the moment. I love this idea: everyone is a fan of something. That's Funko's motto, and it really speaks to the idea of this stream of fun things that people align on and can be monetized. 

The company is also a manufacturer. Once it gets a license, it goes out and uses manufacturers in Vietnam and China, for example, to manufacture these goods at a low cost. It has gross margins of about 30%, which we'll get to in just a moment. I think those can improve some. But just to give you a little bit more information about the company, they have over 1,000 licensed, what they call properties. Any time the company goes out and figures, let's take Han Solo, for example, let's license Han Solo's likeness into a bobblehead or a vinyl figurine -- that's called a property. They have about a thousand of these licensed properties, and they can go from the idea stage to a pre-order in about 70 hours. This is an example of how quickly tastes in pop culture move. 

So these are just a few more facts about Funko. I think, again, with this IPO class of 2017 we talked about, another one to put on your radar screen and watch over the next few quarters.

Shen: The only thing I'll add -- we have to move on quickly here -- is, with that time to market that you just mentioned, the fact that they have to capitalize on opportunities like a new movie release, a new video game release, for example, they compare, I saw in their 10-K, the way they do this, bringing products to market quickly, they compare it to fast fashion apparel companies. They talk about how they can go from the design stage to store shelves between about 110 and 200 days traditionally, sometimes in as few as 70 days. To give a specific example, with the release of the Guardians of the Galaxy movie in 2014, the company said they were pre-selling a figurine for Baby Groot within a week of the film's release. They move very quickly when the consumer interest in these properties, as you described, is at its peak. 

The other thing I would like to add, in terms of the high-level opportunity, in terms of pop culture and accessories and how much consumers might want them, in the company's IPO filing, they present a pretty interesting case for the growing influence of pop culture thanks to there being more movies, more TV shows, more video games, and the increasing quality of that content, and then, the ability for fans to connect and engage with that content through, for example, social media and other forums. They really make a solid case for that.

GameStop actually gets brought up. Its traditional retail business is falling apart at this point since most video games can simply be downloaded without any sort of actual disk or cartridge now. The company is placing a lot of its hope in its collectibles segment, which is pretty comparable to what Funko does. That collectibles segment for GameStop has more than doubled in the past few years. Revenue was up almost 30% in 2017 to $635 million. It was up another 25% in the most recently reported quarter. If you read GameStop's earnings call discussion of that segment, they mention several times the importance of being quick to market with their collectibles. Obviously, again, that speaks to Funko's abilities there. I'm going to stop us there just because we have this whole other space to talk about. 

Our main event is the online travel agencies. The main thing I always like to remind people of when getting into this topic is the scale. Online travel sales make up a huge industry that's been growing double digits for years now. It should still average about 9% annual growth through 2020, at which point spending will hit almost $800 billion. Right now, though, the online spending still makes up less than half of global travel spending in total. We're talking about, ballpark, about $1.6 trillion, a massive sum. 

The two companies we're discussing today, TripAdvisor and Booking Holdings, they represent what I would consider different ends of the spectrum. First, we'll talk TripAdvisor. I'm sure many of you listening have referred to TripAdvisor reviews and guides in the past when you've done your vacation planning. The company has over 430 million average monthly unique visitors, and though it previously relied on paid clicks from those users to book lodgings and other accommodations, the company has spent about two years now trying to become a destination itself for booking hotels and other accommodations. 

The results of those efforts have been somewhat mixed. If you look back five years, the stock has really languished. It's trading at about half its all-time highs. But more recently, investors have been flocking to the company. For 2018 year to date, TripAdvisor shows are actually up almost 70%. Asit, what's the latest for TripAdvisor? Why the bullishness recently?

Sharma: Vince, the bullishness is ironically not due to any wild revenue growth that the company has in the future. It's due to improving margins, the basic blocking and tackling of strong companies that have these built-in, recurring revenue streams. TripAdvisor sprung to life this year, up 67% to date, because investors like what they're seeing in its earnings.

What really caught my eye is the way the company's controlling its marketing spend. Previously, TripAdvisor has been a big spender in the online marketplace. But in recent quarters, it started to shift a little bit. It's advertising on TV, interestingly enough. I think the company spent about $24 million on TV advertising in the last quarter, which is unusual. As a result, it's using that marketing budget much more effectively. If you look at selling and marketing spend in the first quarter of this year, the company spent $198 million. That's 52.4% of total sales of $378 million. Go back to last year this time, TripAdvisor had a spend which was about 55.6% of its $372 million in sales. That's about a 4% or 400 basis point reduction right there. 

That's something, when you have a revenue stream which is highly predictable, if you can't grow that revenue stream by leaps and bounds, any ability to show efficiency in the margin will attract investors' attention. And I think there was some pent-up demand for the stock, too, given that it had languished while other companies, other online travel agencies -- like Booking Holdings, which we'll talk about later -- had continued to climb. There may be a perception on investors' parts that it's time to pour into the stock.

Shen: OK. Some of the major themes for this company that jumped out to me, at least, have been, one, its transition from just a place for reviews to an actual portal for people to book their travel; two, it's clear that management is really trying to figure out how they're going to further monetize this massive user base that they have, all this traffic that they get, especially as users migrate to mobile platforms, which presents some challenges for them that we'll talk about; and then, three, they have to manage some of the competition that they're getting from bigger peers like Booking Holdings but also big tech names like Alphabet as well. This is still a very fragmented space and definitely presents some unique competitive challenges in that way.

On the mobile front, I'll just speak to the fact that management has mentioned how the higher mobile traffic that it's seeing has a multi-prong effect on the business. On one hand, the advertising revenue goes down, because the company wants to keep their mobile experience relatively clean, easy to use. That means less ads on the mobile site. On the other hand, conversion rates are weaker on mobile in general, which means partners end up paying less per click they receive from users through TripAdvisor's portal. That's one way how the transition to mobile is challenging the business. 

But management is really focused on the fact that, there's nothing they can do about traffic moving to the mobile platform. Trying to optimize that traffic, keep the user experience as positive as possible, and develop the revenue opportunities there, is definitely a priority for them.

Then, something else that I know that you wanted to speak to is the importance of a new category for them or a growing category, and that's with experiences. Do you want to share a little bit about that?

Sharma: Sure. The company breaks its revenue up into two segments, basically its hotel and non-hotel services. Non-hotel services are comprised of three components: experiences, restaurants, and rentals. Those of you who have been following TripAdvisor for a long time may remember when it first got into this idea of selling experiences, that is, a complete package, versus just a place to stay on your vacation. It was able to do so, because it has this massive base of content and loyal base of users. 

I was interested to see that this non-hotel segment grew 36% in the most recent quarter. This is where the company is experiencing revenue opportunity, even though, when you look overall, the total revenue is still sort of flat-lined. I think that this is also a consequence of that revenue per user that you talked about, Vince, they call it revenue per hotel shopper, that's decreasing as time goes on. They're getting less conversion. They're getting less out of their marketing efforts. That revenue decreased 11% to $0.42 per visitor in the last quarter. Meta-search, which is the tool they've used for a long time, searching for a hotel and TripAdvisor's site comes on, that's getting weaker. However, the content they've built over a number of years is strong enough to the point that it's an attractor for business. 

I wanted to mention something that's related to all of this. This goes back to, Vince, what you were talking about, in terms of mobile and advertising revenue. Because TripAdvisor is such a great content site, it has really come up in the consciousness of hoteliers and restaurateurs as a place where they should be placing ads. The reason is, if you're looking for this total experience on their site, promotional placement becomes very important. Maybe, as a restaurant, you're not top-of-the-mind when Vince is planning his vacation. But if you have placement on TripAdvisor's site, that will cause you to have a higher placement in that consumer's mind. 

Surprisingly or not surprisingly, that advertising revenue is starting to increase. Part of this is just hoteliers and restaurateurs trying to get on TripAdvisor's site. I think advertising and subscription revenue, that rose $6 million in the most recent quarter, which provided an offset to that hotel segment revenue, which had declined by about $22 million. We're talking about this hotel-only segment now. So you can see the force of the content that the company's built. It helps absorb some of the traditional revenue that's in decline.

Shen: I'll just say that, with that non-hotel segment, it's definitely a bright spot that management has pointed to, that investors are watching. In 2015, non-hotel made up, I think, just 15% of the top line. Last year, it was 23%. Pretty rapid growth there. 

I can see why, personally, in my experience, TripAdvisor is positioned especially well for this opportunity, based on how a lot of people use the site, myself included. You think about most travelers, they have their airfare and lodging usually booked pretty far in advance -- weeks, if not months. But I think a lot of people plan their day-to-day itinerary maybe the day of, maybe the night before. As they go to TripAdvisor, because it has millions upon millions of reviews, over a million different locations and attractions with reviews, as people go to TripAdvisor to look at things to do, the company's in a very great position to not only offer those reviews but then to potentially sell things like tickets toward other experiences on the spot. At a JPMorgan conference last month, CEO Steve Kaufer, he said he thinks attractions will eventually be a multi-billion-dollar revenue stream for the company, so very important, they're very focused on that.

Let's move on now to the other end of the spectrum that I mentioned. Now, we'll talk a little bit about Booking Holdings. 

Formerly known as Priceline, this is a huge company, over $100 billion in market cap. Even though TripAdvisor is less than a tenth of that size, and it's been dinged for really failing to deliver the growth that investors want for the past several years, Booking Holdings is on an absolute tear, with about 20% growth in the top and bottom lines last quarter. 

The thing that always shocks me about this company is the breadth of its full portfolio. If you've heard of booking.com or Priceline or KAYAK or rentalcars.com or even OpenTable, guess what? Those are all under the same Booking Holdings umbrella. Really impressive. With that kind of reach and that kind of consistent growth, the stock has been very, very kind to shareholders. The company is quite a favorite here at Fool HQ. What do you think is the secret sauce here, Asit, in terms of the strength of this business?

Sharma: What I love about booking.com is, it has an extremely simple strategy, and that is to take the market by brute force. The company only has a very small portion of the total market share for travel, as big as it is. Among online travel agencies, it's quite huge. But as Vince had mentioned, booking.com has grown by being a serial acquirer. Just to give you a couple of other names besides the ones you called out, I'll list Agoda, OpenTable, I think you said that, and Momondo.com, which I've used before to isolate flights that didn't show up on other engines, which were actually owned by booking.com.

This strategy of tacking on is really a brute force mechanism to increase inventory. If you look at some statistics from the very last quarter that's been recorded, booking.com had approximately 1,740,000 properties on its website as of March 31st of 2018. That comprised 415,000 hotels and resorts, and approximately 1,325,000 homes, apartments and, they call them, other unique places to stay. I hope we have time to talk about the alternate lodging market in just a moment here.

The company hasn't grown this way through organic growth but having its sales force go out and acquire more and more hotels for its listing on its original site, priceline.com, as you point out, Vince. Using capital from its pretty high margins to keep buying up more what is essentially hotel inventory, is the way that it's grown. It's a different strategy than TripAdvisor, which is smaller, more specialized, relies on content to drive its growth. This is a very easy-to-understand economic engine. And if you doubted that engine several years ago, you would have missed out on a lot of return. 

It doesn't have quite the allure of a really, really highly technical company. Basically, it functions very similar to the way it did when it first originated. However, that's led to -- let's look at this most recent quarter again -- gross bookings were up 25% to $25 billion. Now, that's not the company's net. The company's net sales out of that were $2.9 billion. But you can imagine what it takes to achieve $25 billion worth of gross bookings. That's a lot of hotel rooms. That's what I love about this stock -- it's really easy to understand how it makes its money, and it's a very consistent earner in that respect.

Shen: Yeah. I will add that, what you mentioned, in terms of, Booking is the industry gorilla, but at the same time, its slice of the pie is relatively small. The total bookings that I could find for 2017, $80 billion. The total digital travel spending for last year, I think, was nearly $600 billion. So again, a really small piece of that pie and quite a runway for the company going forward. 

In terms of outlook, I think macro factors are really going to influence this business more so than maybe specific competitors, because as the overall travel industry grows, I think Booking is in a really strong position to continue expanding its share of the pie, even though management has acknowledged, quite a few times now that going forward, the company's growth will decelerate just due to the scale, it being the No. 1 player in this space.

I'm curious, Asit -- between Booking Holdings and TripAdvisor, are you sold on one or the other, both companies, on the space in general? What do you think?

Sharma: It's an interesting question. My father, who's an investor, had told me about priceline.com years ago, and he has off-and-on been a shareholder of this company. Unfortunately, as many of us do, he got out on some small dips but has learned to hold this company. So I've watched it over my shoulder, and I'm sort of sold on its growth. I think, outside of 2017, it's had several good years in the market. And these are steady returns of 20%-plus years of stock price appreciation. 

I do like the macroeconomic factors which favor booking.com. As long as global GDP continues to grow moderately, 3% to 4%, that's a positive environment for this company. I also like the way that it's muscling into the alternative lodging market. It just announced recently that it surpassed Airbnb in terms of private rooms available. At the point it announced it, I think on the most recent conference call, the CEO said they have 5.2 million, versus 4.85 million properties for Airbnb, so it's also expanding into new markets. 

TripAdvisor, they have a really, really strong asset. Again, if you want to talk about intellectual property with Funko, TripAdvisor's site is its intellectual property. It still has enormous potential itself, but the proof is in the pudding. 

If you had to choose -- and I think you posed this question to me this way, Vince -- if you had to choose one of these companies and only one to invest it, it would probably be booking.com, although it's a few magnitudes larger than TripAdvisor. What do you think? What is your differentiation between the two?

Shen: For me, I'm in the same boat as you. The big selling point is, you have the relatively fragmented travel industry overall. I think, in those situations, scale can be a particularly powerful advantage. With, at this point, Booking Holdings generating over $3 billion of free cash flow each year that it can deploy for more acquisitions, adding more brands and platforms to its portfolio, it can invest in new categories, like these unique private listings to compete with the likes of Airbnb, I'm actually really sold after this latest look at the company, and I plan to pick up shares as soon as our trading rules here allow. 

So between those two, I'm leaning toward Booking, for sure. But overall, this is definitely a space that I have not had exposure to previously in my portfolio, and I'm looking more and more at it every single time we talk about it now and over the past year or so. 

With that in mind, any final thoughts from you, Asit, before we wrap up?

Sharma: If you buy into booking.com, keep in mind what Vince said. The company has said, eventually, it's going to have a little bit of deceleration. I think they're forecasting booked room nights to grow by about 7% to 11% this next quarter. That's a little bit more moderate of a pace than the past. So you'll have, maybe, some sequential dips here and there in performance, which could be reflected in the stock price. Those could be good entry points, nothing to panic over. Year in, year out, this company has a talent for returning a pretty nice appreciation for its shareholders.

Shen: Alright! Thank you so much for being here today!

Sharma: Thanks a lot! Appreciate it!

Shen: Fools, thanks for listening! Remember that people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Booking Holdings, TripAdvisor, and Walt Disney. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.