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Morningstar | TripAdvisor Sees Solid Monetization and Profit; Prior Underappreciated Thesis Reflected in Shares

Our long-held previously underappreciated thesis that investors weren't recognizing TripAdvisor's network advantage (the source of its narrow moat) continued to play out during the third quarter, which saw improving monetization (5% revenue per hotel shopper growth, the strongest in at least five years) and marketing expense leverage of 1,129 basis points to 45% of total sales. We plan to lift our $57 valuation toward $60 to account for lower marketing expense.

With shares now up around 100% in 2018, valuation has moved beyond our fair value. And while price momentum can sustain in the near term, we see a more attractive long-term opportunity in the online travel industry with narrow-moat Expedia, which is trading at a 30% discount to our $180 valuation.

Sales growth of 4% tracked slightly below our 6% forecast, as a pullback in performance marketing spending affected hotel shopper traffic, which saw 5% two-year stacked growth versus the 11% lift from last quarter. The traffic drop doesn't concern us, as we expect TripAdvisor to deleverage marketing in 2019 and beyond. Also, the 5% year-over-year improvement in revenue per shopper, in line with our forecast, points to improving monetization that we believe is sustainable.

TripAdvisor continued to show meaningful marketing expense leverage despite beginning to lap efficacy efforts. TripAdvisor now sees mid-20% 2018 EBITDA growth, well above our and consensus forecasts for around 10% growth. We believe the majority of efficacy benefit will expire by mid-2019, but improving data analytics should offer some sustained benefit. We plan to maintain our 3%-4% 2018 sales estimate but lift our EBITDA forecast to a mid-20% growth range. We still expect industrywide marketing deleverage in 2019-20, as companies wisely invest into growth areas like Experiences (about 20% of total sales), where TripAdvisor is currently the leader, witnessed by its nonhotel segment (33%) growing sales 20%, directly in line with our estimate.

Mobile (over 50% of hotel shoppers for the first time) and desktop reported 25% and 10% revenue per shopper growth, respectively, supporting TripAdvisor's network advantage. New initiatives are also aiding improved monetization. For instance, TripAdvisor is in the early phases of offering its partners sponsor ad placement to drive awareness and conversion and will also be launching its New Experience platform next week, which customizes content from trusted sources for travelers. This supports our forecast that revenue per hotel shopper can improve $0.01-$0.02 a year over the next several years from the roughly $0.41-$0.42 level we estimate for 2018 and compared with the $0.56 level reported in 2014 (before mobile proliferation; mobile monetizes at less than have of desktop, although that gap continues to narrow).