A Bargain at TripAdvisor

With shares trading at a 30% discount to our $70 fair value estimate, we believe the market has become too pessimistic on narrow-moat

TripAdvisor shares have seen pressure, as it faces a few near-term growth headwinds from its Instant Book, or IB, platform launch. Educating customers on its direct-booking capability leads to higher near-term marketing expense; further, revenue has slowed recently, as there is a learning process to improving IB conversion, and the direct-booking platform shifts revenue recognition timing until a stay has occurred, as opposed to the company’s core meta-search platform, which records sales upfront.

Still, we believe IB will support TripAdvisor’s network advantage (source of its narrow-moat rating) in the longer term, and we forecast sales to accelerate in 2017 to a low-teens level, followed by midteen average annual sales growth in 2018-22. IB enhances the user experience, as transactions occurs on TripAdvisor’s platform versus directing customers to third-party websites, saving the customer from having to reenter information, while also providing more accurate pricing and availability. Further, IB should allow the firm to retain more of the transaction economics over time.

IB should support TripAdvisor’s network advantage. In October, visitation to TripAdvisor totaled 129 million, versus narrow-moat Priceline’s booking.com and narrow-moat Expedia’s respective 270 million and 56 million. This engagement is impressive relative to narrow-moat Marriott’s (world’s largest hotel operator) 30 million visitation to its website in October. TripAdvisor also hosts a large supply of travel content with 830,000 vacation rentals, over 1 million hotels, 4.2 million restaurants, and 730,000 attractions.

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