Traveling is more complicated than ever, and with the near-disappearance of professional travel agents, travelers increasingly rely on online services like TripAdvisor (NASDAQ:TRIP) to give them the information they need in order to make smart decisions. Even though rival priceline.com (NASDAQ: PCLN) is the undisputed leader in terms of providing huge returns to shareholders, TripAdvisor has done a good job, as well. Shares hit highs earlier this year that quadrupled from where they traded shortly after its late-2011 IPO.
During November, though, TripAdvisor stock hit some turbulence, and investors wonder whether the company can regain altitude and keep cashing in on an improving U.S. economy and its consequent impact on travel activity. Let's look at TripAdvisor's latest moves to see whether shareholders should be scared or excited about its future.
Why TripAdvisor crashed and burned
TripAdvisor got off to a terrible start in the month of November with its third-quarter earnings report. From a revenue perspective, the quarter went reasonably well for TripAdvisor, with 39% growth in sales based not only on strength in its core North American segment, but also on even faster growth rates in areas like Latin American and Europe. Click-based advertising provided more than 30% higher sales than last year's third quarter, and subscription and other revenue more than doubled.
Unfortunately, though, TripAdvisor couldn't turn its top-line success into higher earnings, with adjusted net income rising just 9%. Free cash flow plunged by nearly two-thirds, and GAAP earnings also fell slightly.
Investors were especially disappointed with how much TripAdvisor's expenses held back its bottom-line growth. During the quarter, operating expenses soared by 57% from year-ago levels, and TripAdvisor's guidance for the remainder of the year suggested even further expansion on the cost side of the income statement. Admittedly, many of those expenses are coming from efforts that TripAdvisor hopes will eventually pay off in greater amounts of business. But given how expensive TripAdvisor shares are on a forward-multiple basis compared to Priceline and other online travel portals, investors aren't willing to give TripAdvisor much slack when it delivers subpar results.
Are the long-run prospects for TripAdvisor still bright?
Even with the short-run decline in its stock price, TripAdvisor still has a lot of things going for it. Unlike many Internet-based companies, TripAdvisor has made substantial progress in driving growth in its mobile-oriented business, with about half of its 315 million unique visitors coming from mobile devices. With more than 150 million downloads of its mobile app, TripAdvisor is aiming at becoming even more popular among the tech-savvy crowd. That's especially important in focus areas like online reservations, where TripAdvisor is going after Priceline's OpenTable service with an instant reservation feature of its own.
The big question that TripAdvisor faces is whether its acquisition-based strategy of expanding its reach across the travel industry will continue to pay off. As long as buyouts like LaFourchette and Viator end up delivering valuable features that customers value, then TripAdvisor's money will have been well spent. Yet, whenever a company looks outside its own corporate structure for growth opportunities, it takes on the challenge of integrating an entirely separate entity into its own corporate culture. That could pose difficulties that TripAdvisor will have to overcome in order to maximize its profitability.
In the end, TripAdvisor has had to deal with some questions about the sustainability of its high growth rates, and those growing pains are likely to continue for a while. Like any other growth-oriented stock, investors will show their concern by bidding share prices downward from time to time. Yet, with so many fundamentally positive things going right for TripAdvisor, the company's efforts to expand its reach and become a more comprehensive travel information and services provider appear likely to pay off in the long run.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Priceline Group and TripAdvisor. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.