Shares of Tripadvisor (NASDAQ:TRIP) have fallen by more than 35% on the morning of Wednesday, May 8th, on news that the company's after review of potential acquirers' interest was concluded.
Shares of the travel review and booking company had risen more than 60% in the past year, and above $25/share on recent takeover rumours (see here and here).
While this is a terrible loss for investors who owned shares of TRIP going into Wednesday, for other investors like myself, it's a tremendous opportunity to re-enter the trade. I hit the buy trigger at the opening bell this morning.
There's an opportunity here to benefit from M&A speculators selling out, even though there remains the possibility that the company will find a merger partner at a future point.
Business Overview
Tripadvisor differs from many other travel websites in that its core business has revolved around providing travel and entertainment reviews/advice as opposed to bookings. Tripadvisor's pages can be used to access customer reviews of hotels, restaurants, major attractions. I began using Tripadvisor for my travel research initially out of concern that info I found on the core Online Travel Agencies (OTAs) might somehow be biased.
Something I've appreciated at Tripadvisor are the customer photos of accommodations when assessing whether I want to stay at a particular hotel. Any traveler will have experienced an occasion when the hotel/resort they booked didn't look anything like the photos they saw online. This is something that has continued to be an advantage at Tripadvisor as compared to major competitor Yelp (YELP), in my opinion.
I cannot recall when Tripadvisor began offering travel bookings on their platform, but originally users would see a single price. The booking service has now developed to where it looks a bit like Trivago's offerings, which pull booking quotes from several different OTAs.
Viator Potential
Tripadvisor purchased Viator.com in 2014, and I'm a big fan of this segment. Viator is one of the online leaders in day-trip (or short multi-day) tour bookings. They're kind of a marketplace on their own, as they source tour offerings from local operators.
While naysayers about Tripadvisor may argue that the major OTAs can 'nickel and dime' the company on travel booking listings, Viator should essentially be able to do the nickel and diming in the local marketplace as small tour operators have limited bargaining power.
As a fairly independent traveler, I've never been fully satisfied with long all-inclusive travel tours such as those provided by Contiki, G Adventures, Intrepid and others. I appreciate having a guide for certain parts of my travel adventure, but at other times I usually just want to do my own thing; sleep in, hit the beach, or make my own plans like visiting a local market. This is where Viator can step in with their offerings.
Viator has been Tripadvisor's real growth engine in recent years, and now almost represents 50% of revenues.
Financials
Tripadvisor is profitable, cash-flow positive and growing. Its business is seasonal, reflecting the acceleration of travel research and booking during the summer months. The 3rd quarter ending in September tends to represent 30% or more of annual revenues. The quarters ending in December and March tend to be the weakest.
Revenues naturally took a major hit during the pandemic, but have regained their footing.
Non-GAAP EPS over the past 4 quarters (including the Q1 results posted today) have totaled $1.36. The consensus forward estimate for the current year is $1.53/share.
Cashflow from Operations came in at $235 million for 2023. Annual capex is in the $60 million range, bringing Free Cash Flow (FCF) to about $175 million.
Valuation
Following today's share price collapse to the ~$17.50 range, shares of TRIP are now trading at a forward Non-GAAP P/E of about 11.5x, as compared to about 17.5x just a few weeks ago when the market was betting on an acquisition above $25/share.
EV/FCF is now under 13x, as compared to above 19x. The air has really come out of the shares following the surprising update by Tripadvisor's special committee.
Summary & Risks
I'm the type of investor who very much believes in the mantra "buy the rumour, sell the news". No matter that how much I liked Tripadvisor and the growing contribution of Viator (whose prospects I'm very, very optimistic on), when rumours surfaced about a possible takeover of Tripadvisor earlier this year, I decided to cash in at around the $26/share level. I wasn't going to let emotion or personal preference decide whether Tripadvisor remained in my portfolio.
As news hit the wire this morning of Tripadvisor's board of directors' decision to not recommend a sale of the company at this time, I was probably visibly excited at the opportunity to become a TRIP shareholder again.
Unfortunately, this also means that many TRIP shareholders are hurting this morning, and I'm sorry for your losses. If you purchased shares on the basis of the M&A rumours that have not come to fruition, you may wish to consider averaging down at this point if you agree with my positive outlook for the company on a standalone basis.
For other shareholders like myself, today's decline may be a timely opportunity to re-enter the trade. I've re-acquired a full position in TRIP at an average price of $17.16.
Risks
The risk/reward looks terrific at these levels, especially for those who prefer companies with a strong balance sheet (Tripadvisor has a net cash position).
The biggest risks I see for TRIP underperforming and squandering shareholder value from this point come from the competitive landscape the company operates in. There are much larger players out there such as Booking Holdings (BKNG) and Expedia (EXPE) who could try to render Tripadvisor offerings redundant, especially given Tripadvisor customers are already redirected to book their travels with these dominant OTAs.
Jeffrey Fischer, CFA
25 years+ in the financial/investment industry. Most recently I served as Senior Managing Editor here at Seeking Alpha; the tail end of an ~11 year stint working for SA. Prior to this, I worked as a Treasury Manager for a large commodities firm, where I managed financial liquidity, currency risk hedge portfolios, and investment arbitrage trades. I've also worked in financial performance analytics, trading, and banking. I have a healthy interest in behavioral finance and love a good investment "story" at least as much as a financial analysis. My investment ideas on SA will likely be a mix of contrarian, event-driven, and structured trades.I completed the requirements of the CFA Charter in 2003, and am an active member of the CFA Institute.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TRIP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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