Since its spinout from Expedia Inc (NASDAQ:EXPE) and becoming a public company in December 2011, Tripadvisor Inc (NASDAQ:TRIP) is up 22%, about even with the NASDAQ. The company allows its users to access a database of reviews of primarily hospitality providers- hotels, inns, and bed and breakfasts-as well as restaurants and other service providers. Needham recently initiated coverage on the stock, naming it a buy.
In the second quarter of 2012, Tripadvisor’s revenue was up nicely from the same period a year earlier, showing a 16% gain. However, costs were considerably higher, notably administrative costs and in particular a large increase in stock-based compensation. Net income declined as a result. To some degree this is to be expected as the independent company now has to pay costs that were previously covered by the larger Expedia organization, and so cost growth over the next year should not be as high. However, even after stripping out increases in stock-based compensation selling and marketing costs grew faster than revenue. In addition, cash flow from operations was down.
Tripadvisor Inc now trades at 26 times trailing earnings. Wall Street analysts think that the company is going to grow to the point where the current market cap of $4.8 billion represents a multiple of only 19 on earnings estimates for 2013. Our point of view is that its cost growth should slow, and that revenue is likely to continue growing, and so that margins could be on the way up.
There is a good deal of interest in Tripadvisor Inc from hedge funds, according to our database of 13F filings. Hedge funds like to invest in spinouts because management of the new company can concentrate on improving their core business rather than serving the interests of the larger organization. Learn more about spinouts and why they often make for good investments. Tiger Cubs in particular seem to like Tripadvisor, with three of the four largest positions in the stock being held by funds managed by former Tiger Management employees. Andreas Halvorsen’s Viking Global had the largest position, at the end of June, with 9 million shares (see more stocks owned by Viking Global).
The online travel industry as a whole is expected to achieve strong growth in the coming years, and so compared to many of its peers Tripadvisor is not particularly high priced. HomeAway, Inc. (NASDAQ:AWAY) is barely profitable on a trailing basis, and even looking forward to 2013 the vacation rental property website owner trades at 40 times expected earnings for that year. It grew its earnings substantially in its most recent quarter compared to a year earlier, but revenue growth of 22% was not much higher than Tripadvisor’s. We don’t think it is as good a value. Expedia and Priceline.com Inc (NASDAQ:PCLN) depend on bookings as opposed to reviews, but still make for good comps as they are also driven by travel trends. They are also larger businesses than Tripadvisor. Expedia and Priceline both trade at 17 times forward earnings estimates, however, which implies an actual discount relative to Tripadvisor’s forward P/E. With Priceline in particular showing very strong earnings growth recently- up 37% last quarter over a year ago- we think it may be the best buy in the industry, and like Tripadvisor Priceline counts many hedge funds among owners of its stock. Read about hedge fund investments in other travel companies.
Investors could also consider Yelp Inc (NYSE:YELP) as a peer as it too operates as a collection of reviews of local businesses. Yelp is looking at unprofitability this year, but analysts expect it to break into the black in 2013. It still trades at a very high forward P/E, but the theory is that earnings growth will continue and lead it to justify its $1.8 billion valuation- about 40% of Tripadvisor’s market cap, even though the latter company is clearly profitable already.
