What's Pulling TripAdvisor Stock Out of Its Multi-Year Slump?

After at least five years of middling stock performance, TripAdvisor (TRIP) shares have soared year to date.

In this Industry Focus video devoted to online travel agencies, we discuss TripAdvisor's marketing spend and its non-hotel revenue -- two critical drivers behind the company's recent success. We also analyze other success factors, including one of TripAdvisor's most valuable assets: its growing, user-generated content.

A full transcript follows the video.

This video was recorded on June 19, 2018.

Vincent Shen: 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?

Asit 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.