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Morningstar | Market Misinterpreting Narrow-Moat TripAdvisor's Solid 2Q Results, Shares Slightly Undervalued

In our view, TripAdvisor reported a solid second quarter with stable sales trends, improving profitability, and a continued expansion of its network (source of its narrow moat), and we see any concerns over decelerating non-hotel revenue or hotel shopper growth as misinterpreted. We don't expect any material change to our $56 fair value estimate, which incorporates roughly 10% sales and high-teens EBITDA growth annually over the next five years. We see shares as slightly undervalued.

Total sales grew 2% (versus our forecast for a 1% drop), accelerating to an 11% lift from a 7% rise last quarter on a two-year stack basis. Non-hotel (28% of sales) revenue grew a healthy 22% (versus our 16% estimate), a deceleration from the 36% lift seen last quarter; but more telling is non-hotel's 53% two-year stack growth, stable from the 55% level posted in the prior quarter. Non-hotel strength is driven by experiences, where TripAdvisor remains industry leader.

Hotel (72% of sales) revenue declined 4% (versus our 6% forecast) with platform sales (64% of hotel segment revenue) dropping 7% (versus our 12% estimate). And although hotel shoppers fell 3% (first ever decline and versus our 2% drop forecast), the two-year stack trend for this metric was stable (8% versus 9% last quarter). Further, we believe shopper decline was due to TripAdvisor's marketing efficacy efforts (in a later stage) and expect the company's TV campaign to aid awareness of its platform as a place to price compare, witnessed by improving Google Trend search popularity relative to Trivago, resulting in a return to shopper growth in 2019. Meanwhile, revenue per hotel shopper trends were relatively stable, down 6% (compared with our 11% decline estimate) versus the 11% drop seen last quarter (two-year trend stable at around an 8% decline). RPS was driven by marketing efficiencies (helped by analytics), continued stabilization in pricing, and an improvement in conversion on both desktop and mobile devices.

TripAdvisor saw 390 basis points of marketing leverage to 50.1% of total sales. While this was its third straight quarter of marketing leverage, after years of deleverage, we still expect costs here to ramp back up in 2019, as the company laps efficacy efforts and continues its investment into the experiences vertical. Still, we share management's increased confidence that it will generate positive EBITDA growth, and plan to increase our 4% 2018 EBITDA growth estimate toward a high-single-digit percentage lift.

TripAdvisor's network advantage remains supported by the 10% growth in monthly unique visitors to 456 million, and the 2.1 million accommodation (up 11%), 4.7 million restaurant (up 7%), and 975,000 experience (up 18%) listings, along with the 661 million reviews (up 24%).

It remains encouraging that TripAdvisor continues to see monetization improvements in mobile (nearly 50% of shoppers), which platform enhancements coupled with travelers' increasing comfort with booking through these devices, are driving. During the quarter, mobile revenue per hotel shopper again grew double digits and reached a new all-time high, with mobile hotel shoppers lifting 17% and click-based revenue increasing more than 30%. Additionally, desktop monetization saw improvement, stabilizing at around flat levels, despite not having lapped last year partner efficacy efforts on the channel. This supports our view that overall revenue per shopper will see a return to growth in 2019.