For this episode of Motley Fool Answers, Robert Brokamp and Alison Southwick enlist Motley Fool analyst Seth Jayson for a discussion of comeback stocks, focusing on a few companies that have been beaten down, then turned things around for patient shareholders. They also consider the kinds of circumstances under which Foolish investors will want to jump into stocks that are in the midst of being punished by Wall Street.
In this segment, the Fools review the tumultuous ride of TripAdvisor (NASDAQ:TRIP), which soared as an Expedia (NASDAQ:EXPE) spinoff when it could make most of its revenue from advertising. But changing circumstances in its business and an evolution of internet search behavior trimmed much of its ability to put ads in front of eyeballs, and profits slid. It has succeeded in finding fresh sources of revenue, and begun what appears to be a real turnaround, but questions remain about how well the new business model will work.
A full transcript follows the video.
This video was recorded on Sept. 18, 2018.
Alison Southwick: Let's move on and talk about TripAdvisor. This stock has been a Motley Fool recommendation in some services [I don't know if it was in yours] ...
Seth Jayson: We were ahead of it. That was early at Hidden Gems. It was a spinoff, and so one of our special services that did that kind of stuff recommended it. And then I looked at it for Hidden Gems, and we had it from the mid-$20s I think. Then it went all the way up to the low $110s and then bad things started to happen.
Southwick: Well, bad things happened because, as a traveler, I loved TripAdvisor. I never bought the stock, and then I never paid attention to it again. So what bad things happened to TripAdvisor?
Jayson: It was mostly ad-based sales.
Southwick: And sorry for our listeners. TripAdvisor offers...
Jayson: Hotel reviews was primarily how it started, so selling hotel ads next to those reviews was really the business. And it did a very good job of that. It made a lot of free cash flow and was trading in the $110 range in 2014. That was quite a ways up from when it was spun out of Expedia.
After that they had to change the business, because there were industry changes. There was something called metasearch, where you needed to search across different platforms to find the best prices and start to format the results differently. Then you needed to reduce the friction to get buyers to the hotels more quickly. It started to be a thing where if it takes people four clicks to book their hotel they weren't going to do it, so you needed to switch things around so it was one or two clicks.
This reduced the opportunities for ad revenue for TripAdvisor. Some of this was self-inflicted and I think was the right move. They were looking ahead, seeing where the market was going, and they were taking short-term hits in the hopes of continuing to build the brand and looking out for the long term.
And then they started to get a little bit more competition in reviews. If you think of Yelp or you think of just your Android phone in your pocket, sometimes it's just easier to look at those Google reviews.
Southwick: Google, yeah.
Jayson: Even though I probably trust the TripAdvisor reviews a little bit more, at least on hotels, but now there's so many reviews on other platforms that a review is almost a review of a review. So they've lost an edge there. And at the same time, you had Trivago Guy. I don't know how many of you are sick of seeing Trivago Guy, but I watch Hulu a lot when I'm on the treadmill, and for a while that's all I saw, was Trivago Guy.
Southwick: Haunting your dreams.
Jayson: I know. And Trivago Guy really bugged me, and it especially bugged me because as a TripAdvisor holder and understanding the business as somebody who'd recommended it, they were basically saying, "We look at all these things and find you the best deal." Well, that's what every single site does. They weren't offering anything different. When I think of Trivago, I think of an example of it as sort of irrational competition. They were burning money trying to get market share and to run these ads. To run ads on the internet in order to get traffic.
Well, that still hurts a better player and I say TripAdvisor was a better player, and so not so long ago TripAdvisor was back down to the $28 range, and now it's still only about in the $50 range. Now, they've expanded their offering. They do things like tours. You can book tours when you're in the market and a lot of that is very smart, but I don't know if they'll ever get back to where they were because the business, although it's bigger in terms of traffic and the breadth of what they offer, it's not as profitable as when they were sort of the No. 1 game in town just selling ads.
Southwick: So a comeback in the process TBD.
Jayson: Yes, it's a comeback from $28. It's a double over a year or so, but from here it's tough to tell. I actually sold my shares a while ago because I just had been wondering about the erosion of the form of competitive advantage in terms of reviews.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alison Southwick has no position in any of the stocks mentioned. Seth Jayson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and TripAdvisor. The Motley Fool recommends Trivago and Yelp. The Motley Fool has a disclosure policy.