Morningstar Magazine - August/September 2017 - 54

Strategies

Bumpy Travel Ahead
But TripAdvisor's network advantage
is intact despite headwinds.

TripAdvisor's network advantage stands to
remain and positions it well for the global shift
to booking via mobile applications. TripAdvisor
is a top five travel iOS mobile application in
11 markets around the world, versus 1 and 10 for
Kayak and Trivago, respectively (as of May 9).
Economic Moat

BEST IDEAS: EQUITY

Dan Wasiolek

This article is adapted from a Morningstar equity
research report dated May 23, 2017. The stock
is on Morningstar's Best Ideas list.
At an investor conference in late May, TripAdvisor
TRIP provided insights that point to temporary
sales deceleration, causing a pullback in
share price from the stock's rally after first-quarter
results. Second-quarter results may cause
near-term volatility, but we continue to see
opportunity for long-term investors.
Management said that second-quarter sales
growth for the key branded click and transaction
segment, or BCT, could decelerate to single
digits, down from 12% in the first quarter. We see
this slowdown as mostly transitory. TripAdvisor
tested a new user interface this quarter, causing
some friction in conversion, but it has recently
approached pretest levels. Also, the company
began to shift away from some marketing
channels ahead of its TV campaign launched in
mid-June, which is also cause for a momentary
slowdown. Management reiterated that it faces
difficult marketing spending comparisons in the
second quarter, creating near-term growth
headwinds. Still, we do not plan much change to
our 10% 2017 BCT sales growth estimate, which
compares to TripAdvisor's reiterated target of a
double-digit lift.
We believe that the improving top-line metrics
of the past two quarters support TripAdvisor's
network advantage, the source of its narrow moat.
We think that shares are trading at an attractive
margin of safety to our $67 fair value estimate.

Morningstar August/September 2017

Investment Thesis

Despite intense competition, we expect
TripAdvisor's network advantage to remain in
place over the next decade, supported by a solid
global position, low penetration of travel
advertising spending online, and increased
marketing spend. We expect its sales growth to
slightly exceed a high-single-digit average
annual rate for the industry over the next several
years. Further, only around 25% of total travel
advertising is spent online, versus 40% of
total travel bookings done online, and we believe
that advertising dollars will become more
aligned with industry bookings.
The company has built a leading network of
user-generated reviews and content, which drive
an increasing user base. We see this network
effect expanding due to organic and inorganic
actions, offset by increasing competition
in the metasearch marketplace, where barriers
to entry are lower than in the online travel
agency bookings space. Organically, TripAdvisor
launched its Instant Booking initiative, which
strives to collect a piece of the bookings transactions that previously had not been collected
by the firm. This initiative expands the firm's
business model and revenue opportunity.
Inorganically, the company has been allocating
capital toward acquisitions within the restaurant
and tours market, which have strong growth
opportunities. However, competition is increasing,
driven by Kayak (owned by Priceline PCLN), Trivago
(Expedia EXPE), and Google (Alphabet GOOG),
leading to elevated marketing costs over the next
few years. Additionally, in China both Qunar
(a Baidu BIDU partner) and Ctrip CTRP are leading
in terms of review, revenue, and advertising
growth, which presents challenges for TripAdvisor
in this important market.

TripAdvisor's narrow moat is driven by its
sustainable network effect within the online travel
industry. TripAdvisor has built a leading position
in travel reviews and content (the supply side
of the equation), which in turn has driven strong
unique visitor traffic to the site (the demand
side of the equation).
At the end of 2016, TripAdvisor had more than
465 million reviews and 1.1 million lodgings on its
website, leading to user traffic and revenue
above those of key competitors Kayak and Trivago.
SimilarWeb data showed TripAdvisor had 131
million visitors in January, compared with
36 million and 20 million for Kayak and Trivago,
respectively. This leading position results in
strong returns on invested capital and market
share. We project adjusted ROIC to average
76% during the next five years, well above the
company's 8.9% cost of capital.
Despite this, we don't believe the company
has carved a wide moat, due to lower barriers of
entry and potentially meaningful competition from
new entrants that already have the customer
traffic and budgets to build network scale. We see
online travel agencies' barriers as higher than
barriers created by user-generated reviews
such as TripAdvisor's, though those are in turn
higher than metasearch platform barriers.
Metasearch platforms don't control the inventory
they show on their websites, as hoteliers and
OTAs provide this content. TripAdvisor, on the other
hand, can use its customer base to provide
photos and other descriptive information on hotels,
though obtaining the quantity and quality
of hotel information and relationships that the
OTAs have would require both time and
substantial expense.
TripAdvisor's user-generated review barrier could
be duplicated within a few years. Companies
such as Google, Qunar, Priceline, Alibaba BABA,

Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017