TripAdvisor, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Tripadvisor is the world’s largest travel platform, allowing consumers to plan and book their travel experiences and leave reviews. It connects people to various travel options (accommodations, transportation, attractions, restaurants, and more) around the world and earns most of its revenue from booking commissions and advertising.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Tripadvisor operates a dual business model, with both a “branded” business through their own websites and a “unbranded” business where it earns commissions on bookings made through third parties. This report will analyze the moat, understandability, balance sheet health, financials, and the recent concerns and controversies around the business.

Business Overview: Tripadvisor’s revenue comes from three major sources:

  • Tripadvisor Core: This segment involves revenue from click-based and display advertising, and transaction revenue from travel partners. Within this segment are two lines, branded and unbranded. Branded revenue is derived from transactions on Tripadvisor websites, while unbranded revenue comes from transactions on third party sites.
    • The Branded segment is also comprised of Media & Platform and experiences & Dining subsegments. Media and Platform derives revenue from advertising and subscriptions, as well as platform fees and direct bookings. Experiences and dining derives revenue by taking commissions for sales of products and services.
  • Viator: This segment focuses on tours, activities, and experiences, generating revenue through commissions from bookings.
  • Other: This segment includes subscriptions to various services as well as fees collected from some small business.

Over the past several years, the company has undertaken initiatives to reorganize its different segments. Notably, the Tripadvisor segment has been split into two main portions, the branded one, and the unbranded portion. Historically, the majority of revenue has been derived from hotels, with smaller portions coming from attractions, travel packages, and other smaller revenue items. Geographically, revenue is generated globally, with significant proportions coming from North America and Europe. However, the unbranded revenue comes mainly from the US and Europe.

The travel industry is large and very fragmented. It is also impacted by macroeconomics, with strong growth during expansionary times, and low growth or stagnation during economic recessions. The industry is becoming increasingly tech-driven and crowded with new players. In addition to traditional players, there are newer entrants like Airbnb, Booking.com, and Google. Tripadvisor was one of the first online travel marketplaces, but it now faces challenges in maintaining its market leadership. It should be noted that the travel sector was heavily impacted by COVID-19 in 2020-2021 and, while it has largely recovered, there’s still uncertainty around future variants and economic downturns, making future forecasting very difficult.

Competitive Landscape: Tripadvisor faces competition from:

  • Online travel agencies (OTAs): Booking.com and Expedia have a strong position in the travel booking business, while new entrants are adding to competitive pressure.
  • Metasearch engines: Google, with Google Travel, offers travel options for free, using its extremely popular search engine as an advantage.
  • Experiences & activities platforms: Airbnb Experiences and smaller companies are competing against Viator, pushing for better returns.

All of the competitive companies are significantly larger than Tripadvisor, leading to a concern about their abilities to outcompete Tripadvisor due to scale.

Moat Analysis (2/5): Tripadvisor’s moat can be described as:

  • Brand Recognition: As one of the original online travel agencies, it benefits from high brand recognition among consumers.
    • But brands are losing their power over time due to new competition.
    • There is not real pricing power from the brands for most consumers and the customer acquisition cost is higher because of it.
  • Network Effects: The more reviews and bookings that exist, the more travelers and businesses will want to use the platform.
    • However, this is largely a one-sided market, there is no real network effect of bookings or review. *The quality of reviews can vary considerably and do not guarantee a great experience. And those reviews are also available elsewhere, like Google.
  • Proprietary Data: Given the amount of reviews that Tripadvisor holds and their user base, the data is significant.
    • However, data can not be classified as a true moat as it does not prohibit the growth of competitors.
    • Tripadvisor’s data may not be the most valuable, as consumers tend to prioritize recent reviews compared to older ones.
  • Switching costs: It is very easy for users to switch from Tripadvisor to another platform to book. So there are virtually no switching costs for the customer.

Tripadvisor faces a high level of competition and lacks a durable competitive advantage due to weak network effects, easily duplicated processes, and little pricing power. A rating of 2/5 is appropriate, with only a weak brand name and minimal switching costs.

Risks to the Moat & Resilience: Tripadvisor faces a few risks that could erode the moat:

  • Google’s entry into the travel market: Google can easily leverage its own search engine to take market share, and the increasing reliance on AI powered solutions could harm its business if Google provides these at a higher quality.
  • Increased competition from other travel agencies: It will become difficult to sustain margins in the increasingly competitive sector, and more and more companies will try to eat into the market share.
  • Inability to keep up with new technologies: If there is a sudden shift in technology or preferences, Tripadvisor may not have enough flexibility to react quickly, and it may lose market share.
  • Ad revenue decreasing because of bad advertising market: A portion of revenue comes from advertising which fluctuates with the larger economic market and can decline sharply if the economy slows.

The business resilience, however, is strong, because Tripadvisor’s business model is largely asset-light, implying that large changes in demand will not have a huge impact on the cost structure. The brand is still powerful and can likely sustain through a turbulent economy. Also, a lot of management expenses have already been recognized and accounted for, meaning that future profits will not be impacted to a large extend by those.

Financial Analysis: Here’s an analysis of Tripadvisor’s financials, derived from its latest reports and earnings calls:

  • Recent Financial Performance (Q3 2024): Tripadvisor reported a strong third quarter with revenue growth of 16%. The growth in Tripadvisor Core revenues was driven by both Branded and Unbranded revenue. Adjusted EBITDA increased by 40% compared to Q3 2023. However, all the gains came from the increase in prices and not volumes, and there’s still little movement with increasing volume for the company. As a result, investors have punished Tripadvisor for the past several years.
  • Revenue Trends: Revenue has been growing gradually post the pandemic rebound, but remains below 2019 levels. There’s heavy fluctuation quarter-by-quarter with travel trends. Also, the strength of the dollar negatively impacted revenues and caused a significant negative effect from foreign exchange rates.
  • Profitability: While the company has reported some profit over the past years, expenses, and notably SG&A, is starting to grow, while profitability has not been matching the revenue. The profitability in the Branded segment is significantly higher than the unbranded segment.
  • Balance Sheet: Tripadvisor’s balance sheet is relatively healthy. As of September 30, 2024, the company had cash and marketable securities of 1.1B, total debt of 688M, with an equity of 1.27B. It has plenty of capital for further expansion. But it should be noted that that debt could increase due to a potential acquisition, or a high acquisition price could dilute the shareholders.

The growth in revenue has been driven by increased prices, which also indicates that the demand is strong and people are willing to pay the premium. In reality though, volumes have stagnated, and it makes further growth questionable.

Understandability (2/5): The business has multiple different revenue streams, with complexities related to geographical differences in revenue recognition, and the technical components around AI and machine learning are not that easy for the everyday investor to understand. The company also undergoes frequent changes in strategy, making consistency and clear reporting difficult. Also, the business is influenced by ever-changing consumer preferences and external macroeconomic and geopolitical forces, all of which are very difficult to analyze and forecast.

Hence a 2/5 is appropriate with clear understanding that complexity is a very large factor in the understandability.

Balance Sheet Health (4/5): Tripadvisor has a healthy balance sheet, with sufficient liquidity to cover its liabilities and to explore investment opportunities. The company has consistently maintained a positive cash position and a history of managing its balance sheet effectively. The debt has been reduced by a substantial amount compared to previous years and the equity has increased with share repurchases. A rating of 4/5 is appropriate here since the debt can increase substantially during an acquisition.

Recent Concerns and Controversies: Tripadvisor has faced criticism for:

  • Inconsistent growth: After being a high-growth company for many years, Tripadvisor’s growth has begun to slow in recent years.
  • Decreasing advertising revenues: Google Travel’s market share has been rapidly increasing, and it has impacted other online travel agencies (including Tripadvisor).
  • Share buybacks: The company has bought back a significant percentage of the shares over the last year. Although it increased the EPS numbers, it did not add any significant value to the company.
  • AI: Many investors are concerned that Tripadvisor might fall behind from newer AI driven travel agencies.

In the latest earnings call, management has emphasized their commitment to cost efficiencies to improve profitability, and their emphasis is to develop a platform where it is easier to book directly rather than relying on third parties for booking. The management is confident to turn around the business and create a more sustainable and profitable long term growth.

Overall, Tripadvisor is a well-established company with a recognized brand name, but it faces intense competition and lacks a strong moat. Its future profitability will depend on its ability to compete in the increasingly crowded market and to innovate with AI driven tools. The business is not very easy to understand, and while its balance sheet is healthy, it needs continued improvements in efficiency to ensure long-term value.