Blue Hawk Investment Group, which manages long-short fund Blue Hawk Fundamental Growth Fund, discussed its investment thesis on Tripadvisor Inc (NASDAQ: TRIP) in Q2 investor letter – you can download a copy here. Blue Hawk is bullish on Tripadvisor. It believes that Tripadvisor is 40%+ undervalued and the stock will return to 20% EBITDA growth in 2019. The letter also included the fund’s thesis on Electronic Arts. In this article, we’re going to take a look at Blue Hawk’s thoughts on Tripadvisor.
TRIP is the leading online travel platform. The company’s user generated content in the form reviews, opinions, advice, and photographs make it the leading destination for travelers researching and planning trips. On the supply side of the platform, Online Travel Agencies (OTA) and direct suppliers (hotels, airlines, etc.) list inventory in the form of hotels, accommodations, restaurants, flights, and cruises with the goal of converting users’ travel demand into bookings. TRIP monetizes through display-based advertising and transaction-based advertising (i.e. commission on a hotel room booking). The company is organized into 2 segments, Hotel and Non-Hotel (Experiences).
Our thesis is that TRIP is a high-quality asset with a strong competitive moat and will return to compounding EBITDA in the high teens/low twenties in 2019. Our conviction comes from two areas: (1) Margins in the Hotel Segment have stabilized as the strength of the TripAdvisor brand has allowed the company to strategically pivot and improve their strategic position within the industry (2) Innovation in the Experiences segment has created a rapidly growing, complimentary business with minimal incremental costs that we believe is worth $5B+. All in all, we believe TRIP will return to 20% EBITDA growth in 2019 and we think the stock is 40%+ undervalued.
From a high level, TripAdvisor is a travel platform built for users researching and planning a trip. The typical steps in planning and booking a trip, the “Travel Journey”, are provided below. Typically, the first and biggest transactions are travel (airfare) and accommodations, which are typically booked before the beginning of the trip.
(1) Core Business – I have been following TripAdvisor for about 5 years now and up until recently the same overhang has kept me on the sidelines. TripAdvisor’s user generated content, the holy grail in ecommerce as its highly trusted by users and impossible to self-generate by a company, has given the platform a strong competitive moat and differentiation. The competitiveness of the Online Travel Agency (OTA) industry however, coupled with the industry/company’s reliance on Google for customer acquisition, has resulted in a spending war for the acquisition of incremental traffic, one in which Google has profited at the expense of the industry. At 1/10th the size of Priceline and 2/5th the size of Expedia, TRIP’s spending resulted in the eroding of margins.
With declining margins and competition increasing, TRIP pivoted about a year ago. Specifically, they shifted their marketing spend earlier in the “Travel Journey” into the less competitive “Research and Plan” leg from the heavily contested “Price Compare” leg. Price Compares are looking for the cheapest rate and are sought after by Priceline and other OTA heavyweights while Research and Planners are looking for information to plan a trip in organized manner. TRIP’s new strategy is the same strategy that Amazon uses – investing in brand awareness instead of bidding on Google for customer acquisition – and is why Amazon no longer needs to have the lowest prices. Users arrive at the platform direct instead of through Google – making the users stickier and reducing competition.
The result is TripAdvisor acquires a less cost-conscious customer and thus a higher quality lead, which has shown up in the numbers. Margins in the Hotel segment have improved without impacting traffic growth, an indication of a healthy platform ecosystem. We estimate Hotel EBITDA margins will settle in the high 20s over the next 2 to 3 years.
(2) Experiences – In 2015, TRIP began expanding aggressively into Experiences (tours, museums, etc.), smaller dollar transactions that are booked later in the process and often while on the trip. Experiences often require additional research compared to travel/accommodations, as they are generally offered by small businesses in foreign regions and are one of the few products in which advertising improves the experience – a typical trip can include many different experiences from separate vendors and booking within the TripAdvisor platform is preferable to searching for the websites of 5-10 outside vendors.
TRIP’s unique platform and content provide unique positioning to pursue this rapidly growing and attractive new business.
Much of the current and future growth in the Attractions business will come from converting attractions to bookable attractions, which should be low hanging fruit. Currently, only 104,000 of the 790,000 attractions are bookable on the TRIP platform or 13% penetration, leaving 87% runway based on simple execution. And lastly, the economics to investors are attractive as the new business requires minimal additional investment – operational and marketing spend – so the segment should add incremental revenue with limited incremental costs, great news for investors.
In all, we think the Experiences business will be worth $5B in 2 years.
Overall – TRIP’s repositioning removes the overhang previously keeping us on the sidelines, and combined with the unique platform, differentiated content, secular tailwinds, incremental growth opportunities, and attractive entry point, we have initiated a position of TRIP into the portfolio. Our 1- year Price Target is $84.
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Tripadvisor Inc (NASDAQ: TRIP) shares are up 46.04% since the start of the year. The stock has lost nearly 9% over the past three months. However the share price has jumped just over 22% over the past 12 months. TRIP has a consensus average rating of ‘HOLD’ and a consensus average target price of $49.13, according to analysts polled by FactSet. The stock was closed at $51.07 on Monday.
Meanwhile, Tripadvisor is a popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 26 funds in our database with positions in the company.
Disclosure: none
