TripAdvisor (NASDAQ:TRIP) lacks the key characteristic that investors usually associate with stocks situated in attractive, expanding industries. Sales growth decelerated to just 4% in the 2018 fiscal year from 5% the year before. The travel booking giant posted a slight revenue decline in 2016, too. In short, there hasn't been much growth from this "growth" stock in recent years.
Yet the company achieved major financial and operating wins over the past 12 months that help explain why its shares trounced the market in 2018. Those successes have produced a stronger business, but one that still faces challenges in boosting its revenue in the year ahead.
Its core hotel-booking business fell 3% last year compared to a 1% uptick in 2017. That segment has now dropped in two of the last three fiscal years, in fact.
Two big factors suggest that this decline isn't as worrying as it might seem at a glance. First, its operating trends improved throughout the year, with the rate of loss slowing to 2% in the fourth quarter from 4% over the prior nine months. The company also returned to growth in its core click-based and transaction revenue at the close of the year.
More importantly, TripAdvisor reduced marketing spending in the segment during the year, which, while hurting customer traffic, led to higher-quality leads for its partners and a more profitable business overall. The division logged a 24% spike in adjusted earnings so that its profit margin improved to 33% of sales from 26% a year earlier.
It's not hard to imagine a near future where TripAdvisor relies on experience and attraction bookings -- what management unimaginatively calls its "non-hotel" segment -- to generate the majority of its profits. The division expanded by 38% in the fourth quarter and by 27% for the full year. It now accounts for 28% of all sales, up from 20% just two years ago and 10% in 2014.
The non-hotel business boosted its profitability through 2018, but it is still firmly in growth mode today. In fact, management plans to "step on the gas," as they put it in a conference call with investors, to scale up the portfolio of bookable attractions, restaurants, and rentals this year. That spending will pressure profits in 2019, they warned, while giving TripAdvisor a more valuable position in a market that's predicted to reach $129 billion of total spending by 2020.
While investors had to hunt for signs of modestly improving sales trends, TripAdvisor's 2018 financial successes are much easier to see. Operating cash flow improved 70% to over $400 million and free cash flow doubled to $344 million. Bottom-line profitability rebounded so that net income was $113 million compared to a $19 million loss in the prior year. On a non-GAAP basis, TripAdvisor earned almost 20% more in 2018 than it did in 2016 even though sales were higher by just 9% over that time.
The company's initial 2019 outlook carried a few caution signs for investors, including the prospect of higher spending in the non-hotel segment and continued demand weakness on the hotel side. Yet this past year's results illustrate that these trends are supporting a wider shift for TripAdvisor's business into building a stronger earnings profile and a more diverse revenue base.