There are many reasons an investor might be attracted to TripAdvisor (NASDAQ:TRIP) stock. It boasts an enviable position in the online hotel booking space, after all, and the travel specialist is cultivating new business lines that might soon become significant revenue streams in their own rights.
Yet a TripAdvisor investment carries risks that could get in the way of management's plan to tackle the $1.3 trillion global travel market while producing impressive returns for shareholders over the years ahead. Let's look at the biggest of these challenges, along with some factors that could make TripAdvisor a good long-term investment.
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Lots of potential
TripAdvisor is the world's biggest travel site, having hosted 455 million monthly visitors during 2017's peak summer season. Those shoppers contributed to a vibrant community of travelers who submitted 600 million reviews and opinions on hotels, flights, vacation rentals, restaurants, and attractions last year.
This is an attractive market in which to hold a leadership perch. Travel shoppers are increasingly looking to the internet to take care of their purchasing needs. But online channels still account for less than half of all travel booking spending. The shift toward mobile purchasing, meanwhile, is expanding that market even further so that users can more often browse for, and book, activities and restaurant reservations while they're on their trip. That all translates into a massive potential sales base for a company that can dominate the niche.
Losing ground
However, TripAdvisor hasn't yet found a way to turn its vibrant community into a robust business that can make a run at the $560 billion online booking industry -- let alone the broader travel market that's worth over $1 trillion in annual spending. Sales inched higher by just 5% last year as the core hotel-booking segment struggled. Travel giant Booking Holdings, by comparison, which operates the Priceline brand, grew its bookings by over 20%.
TripAdvisor's hotel division has also seen its profitably collapse as a shift to an instant booking offering failed to offset challenges from increased competition.
TRIP OPERATING MARGIN (TTM) DATA BY YCHARTS.
In response, management has decided to run that segment with a stronger focus on profits. Investors saw evidence of that strategy at work at the close of 2017, when profit margin shot up to 26% of sales from 16% in the prior quarter. Unfortunately, the company had to sacrifice growth in the process, so its base of hotel shoppers and its click-based revenue trend both worsened during the quarter.
Looking ahead
CEO Steve Kaufer and his team are predicting another profitability uptick in the hotel business in 2018 even as sales slip. That forecast implies a third year of market share losses, which is a big strike against a growth stock like this.
Executives have a much brighter outlook for their non-hotel business. That segment has shot up to over 20% of the broader sales base and should continue expanding as the company adds to its portfolio of bookable attractions, restaurants, tours, and activities.
Ultimately, these challenges suggest that it will take some time before investors have a clear understanding of TripAdvisor's sales and earnings potential. Sure, management might make progress in building a more profitable business in 2018, but that would mark just the start of what's likely to be a multiyear turnaround effort.
Without market-beating growth in its core hotel segment, and improving profitability overall, its hard to see how the stock could produce healthy gains for investors from here. Thus, investors might want to wait for concrete evidence that its rebound plan is working before becoming bullish on TripAdvisor shares.
