Airbnb (ABNB -3.18%) is a well-known booking platform for travelers seeking a place to stay. However, the company also allows people to book experiences -- things including tours and interesting activities. But management deemphasized the experience part of its platform during the worst of the pandemic, choosing instead to focus on the primary part of its business.
In the conference call to discuss financial results for the first quarter of 2022, the topic of experiences came up. CEO Brian Chesky said: "I think there is a massive opportunity for someone to build a huge product around experiences." But that "someone" doesn't appear to be Airbnb at all. Instead, surprisingly, it appears as if that "someone" is Tripadvisor (TRIP -0.83%).
Meet the company dominating travel experiences
Tripadvisor isn't a newcomer to the travel and tourism space. Over 15 years ago, it was even talked about on an episode of the hit TV show The Office, as fictional character Dwight Schrute worried about not receiving high reviews for his beet farm's bed and breakfast. (As a fun aside, there's still a Tripadvisor page for this fictional place today.)
My point is, you're well aware of Tripadvisor's platform if you're anything like me.
If you're like me, you're also well aware that Tripadvisor stock has been an awful investment. It's currently approaching all-time lows after its initial public offering (IPO) over a decade ago.
What many investors don't realize, however, is that Tripadvisor owns a brand called Viator. Viator is a bookings platform for experiences, and its growth is blowing Airbnb out of the water.
In the first quarter of 2023, Viator had over $800 million in gross booking volume -- the dollar value of the experiences. This led to Q1 revenue of $115 million for Viator on a stand-alone basis, which was up 105% year over year. For perspective, this 105% growth is on top of 367% year-over-year revenue growth in the same quarter of last year.
This revenue stream is high-quality as well. Last year, Tripadvisor's management said Viator's gross margin was around 90%.
If you want to compare these numbers with Airbnb, just keep in mind that it's not an apples-to-apples comparison. Airbnb lumps experiences in with places to stay, so we don't know what revenue for experiences is for Airbnb on a stand-alone basis. But in Q1 2023, Airbnb's revenue was up 20% year over year and its gross margin was 76%.
Viator used to receive scant mentions in Tripadvisor's financial reports. But it's getting harder to ignore, considering it accounted for 33% of the company's revenue in 2022 and 31% of revenue in Q1.
Does Viator make Tripadvisor stock a buy?
Before you get too excited about Viator's ability to create shareholder value, it's important to note that Tripadvisor's own gross margin has consistently been over 90% since it went public. It's consistently grown revenue as well (the height of the pandemic aside). And yet, the stock is down nonetheless.
Over the years, Tripadvisor hasn't gained operating leverage in the business. Selling, general, and administrative expenses have consistently eaten up more of revenue, with seemingly diminishing returns considering that its growth rate slowed over time.
TRIP Revenue (TTM) data by YCharts
To single out a particular operating expense, Tripadvisor spent 59% of revenue on sales and marketing in Q1, up from 54% of revenue in the prior-year period. In short, it appears the company has to spend a lot of money to keep users on its platform engaged. And considering it's never really pulled back on spend, there's no way to know if it actually can.
Tripadvisor has considered spinning Viator into its own publicly traded company, and perhaps some wish that it would. But I'm not sure that would make much difference here.
Turning to Viator's stand-alone results, it's not profitable either, not even on an adjusted basis. In Q1, Viator had negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $30 million. Granted, its adjusted EBITDA margin in 2022 was only negative 2%. And spending seems to be weighted toward the beginning of the year, hence the big drop in Q1 profitability. But the question remains: Can Tripadvisor's management team unlock operating leverage with Viator, even though it hasn't with its core platform?
I share Chesky's opinion that there will be a major player in the travel experience space. And Viator appears to be taking share at an impressive rate. Therefore, Tripadvisor is a company I'll be watching with great interest.
However, I'm not ready to fully believe Tripadvisor can unlock Viator's full potential. From here, I'll be watching to see if the company's operating expenses can trend in the right direction. I'll also be waiting to see if ongoing growth can eventually lead to several quarters of profit-margin expansion.
