I reemerged writing independent investment articles for Seeking Alpha at the beginning of May 2024, and at the time I certainly wasn’t expecting to write about Tripadvisor (NASDAQ:TRIP). After all, I had liquidated my entire position in the travel booking and review platform on the late-winter runup on solid rumours that the company was likely to be acquired by Private Equity. The story, and investment opportunity, appeared to be over.
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While in most cases a takeover is a dream scenario for shareholders, this was one of those situations where I sold out of my shares almost begrudgingly, despite locking in an 80% higher price than where TRIP was trading last Halloween.
I did, and continue to see the company’s Viator segment as overlooked and underappreciated. I’m the type of investor who tends to take profits when profits are available, but this was one stock I had long-haul intentions on. Having the company taken out this year by Private Equity would simply have meant that the additional upside I had invested for was, if realized, going to be earned by a PE firm and not me.
To my surprise, and frankly gratitude, on May 8, Tripadvisor management announced their decisions that being acquired wasn’t the best conclusion at the moment. TRIP stock dropped as much as -38% that day, and I was quick to get my hands back on the shares. I was almost giddy, in fact.
I was quick to the saddle both in buying up the shares I had previously sold, as well as drafting a research piece which got to publication around 2pm EST same day. That piece was titled, “TripAdvisor Plummet On M&A Rejection Brings The Stock Back Into Play“.
I rated TripAdvisor a Strong Buy that day, and it remains my highest conviction pick right now. Let’s review the past few months and look forward to the release of Q2 results after market close on August 6, 2024.
Updating The Story
Loan Refinancing
Tripadvisor itself doesn’t help in the update here, as they have issued very little news in the past 3 months. Investors looking at the company’s press releases will only see an announcement of a term loan closing at SOFR +2.75%, which will be used to redeem $500m of 7% senior notes due to mature in 2025. With SOFR standing at about 5.35%, that stands to suggest about a +1% bump in interest rate, or increased interest cost of $5 million per year.
Investors should keep in mind that those 2025 Senior Notes were struck in July 2020 when the Fed Funds rate was virtually nil, so it wouldn’t be fair to draw any conclusion that the rate increase reflects any deterioration of Tripadvisor’s business or creditworthiness.
Q2 Expectations
Tripadvisor’s Q1, which beat expectations, but was overshadowed by the announced abandonment of takeover negotiations, was boosted somewhat by the very early Easter this year. That immediately puts Q2 at a beginning deficit as compared to 2023 (it was certainly inconvenient for Tripadvisor to post a strong Q1 here in 2024 while investors were focused on ‘the other thing’). Company management doubled-down on this citing “unevenness” and “weaker demand trends” in April, when speaking during their Q1 call.
Regarding Viator, which I see as the core potential for the company, revenues rose 23% in Q1. CFO Mike Noonan guided cautiously on Viator for Q2, including the impact of the early Easter positioning. In May, Noonan was looking for Viator growth to pull back a few points. The Q2 Viator business is also up against a really tough comp, as Q2 2023 saw 59% revenue growth over 2022. The end of the pandemic certainly had something to do with that.
Considering these things, I view Noonan’s guidance as quite bullish, as even if Viator could deliver high-teens % quarterly y/o/y growth, despite the tough comp and calendar issue it would remain impressive.
As for Wall Street Analysts, their consensus expectation is for Q2 revenues of $505 million, about 2% higher than for the same period last year. Readers confused and trying to put together the story right now need to remember that Viator recently represented only about 45% of total Tripadvisor Inc revenues, while the core “branded” Tripadvisor segment revenues have been flat to slightly negative recently. That’s how a low-mid single-digit company growth rate can reconcile with growth of ~20% at Viator.
For EPS, Tripadvisor reports headline Non-GAAP, which was $0.12/share for Q1 2024. Wall Street Analysts are expecting TRIP to post Non-GAAP EPS of $0.37 for Q2, which looks great, but we must not forget the seasonality in the company’s business. Tripadvisor posted Q2 2023 Non-GAAP EPS of $0.34, so analysts are looking for about a 10% advance in the adjusted bottom line for the quarter.
My Expectations
This remains a long-haul investment (now that I’ve re-entered the position) for me. I won’t be swayed very much by these quarterly results. I don’t expect Q2 2024 results to deliver any fireworks, BUT the guidance just might.
Let’s remember a few things:
- It’s a summer and the Olympics; the perfect merger for travel revenues (even if Tripadvisor Inc. couldn’t find a suitable merger for itself). On the day Tripadvisor is set to announce its Q2 earnings (August 6, after market close), their Viator platform appears to have 2,332 paid excursion options for Paris, France and nearby surroundings. Everything ranging from a French croissant baking class to a ~$900 private Eiffel Tower and wine & cheese tasting, to a full-day Paris tour, or simply a limousine booking back to Charles De Gaulle airport (with who knows….perhaps Celine Dion). I’m highly, highly bullish on the day-tour travel industry, where Viator primarily operates, as the younger generations of travelers have less patience for 10 days on a bus. And what’s better that a day tour away on a break from the Paris Olympics?
- While it may not seem all that comfortable for the tourists themselves, the recent Spain protests over tourism speaks magnitudes about the number of people traveling there and to other parts of Europe, despite a less than ideal security situation on the continent.
- Tripadvisor also faces much more reasonable comps for Q3, where Viator revenues rose 41% between 2022 and 2023 (versus 59% for Q2) and combined corporate revenues rose just 16%.
Valuation and Conclusion
Tripadvisor remains my highest-conviction Buy recommendation at this time. TRIP shares have pulled back with the recent market selloff led by the tech sector, with the stock having dropped ~10% between August 1 and August 2 alone. This seems like unnecessary collateral damage to a company that should benefit from a more accommodative monetary policy when it comes, and a spike in Summer 2024 tourist activity.
As readers will see from my article, “How Stock-Based Compensation Impacts Your Favorite Tech Stocks“, I’m a wide-eyed owl about SBC, and one downside to Tripadvisor is that the company issues a lot of it. Stock-Based Compensation has accounted for nearly 30% of Tripadvisor’s Operating Cash Flow over the past 2 years combined. Still, I see the company clearing $150m of adjusted-OCF per annum, with adjusted-FCF nearing $100m a year. That would put the company at an adjusted P/FCF of 22x, not cheap, and much worse than the stock would screen without the adjustment.
Nonetheless, the Viator segment (which should soon eclipse core Tripadvisor revenues) and the prospect of a fascinating Q3 reinforces TRIP as a Conviction Buy.
Any dips represent a chance to get in at a lower price, and I’ve been increasing my already full position in the stock.
Risks
Risks to keep in mind include:
- a global economic recession – and indeed recent data provides reason to worry.
- competitive pressures from other travel platforms like Expedia (EXPE), Booking.com (BKNG) and others make it more challenging for Tripadvisor to draw travel search traffic, but it’s worth keeping in mind that Tripadvisor.com isn’t a travel booking site itself, but rather routes traffic to other OTAs, for a commission of course. The research arm’s advantage is that it can draw traffic before prospective travelers reach the booking stage.
- Geopolitical tensions are never constructive for tourist confidence, and we’re now seeing the risk of a further escalation in the middle-east including Lebanon. Rarely do geopolitical escalations occur during the Olympics, so investors should be attentive to what happens post-August 12.
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