Shifting To Sustainable Models And High-Engagement Products Fuels Growth In Travel Tech

Key Takeaways

• Diversifying from traditional hotel offerings to focus on high engagement products and services reveals a strategy for sustainable revenue growth.
  
• Implementing AI and focusing on personalized user experiences are strategic moves to boost user attraction, retention, and conversion rates, potentially increasing revenue.
  
• Shifts towards sustainable models, competition, and reliance on algorithms, along with investment in app-based platforms and external challenges, may cause revenue volatility.

Catalysts

TripAdvisor, Inc. operates as an online travel company, primarily engages in the provision of travel guidance products and services worldwide.

• Tripadvisor's strategy to diversify away from legacy offerings such as hotel meta is leading to a more sustainable business model, impacting revenue sustainability and growth by shifting focus towards high engagement products that meet traveler needs, indicating potential for revenue growth as these efforts scale.
  
• The company's investments in Viator and TheFork are contributing to profit mix and showing signs of improved unit economics and repeat bookings, suggesting an increasing contribution to total revenue and better margins in the experiences and dining segments.
  
• A focus on driving membership growth and the use of their app for direct engagement illustrates a strategic shift towards greater user retention and higher value per user, which could lead to increased average revenue per user (ARPU) and impact long-term revenue growth positively.
  
• Implementation of AI and personalized experiences for travelers, particularly through their app, indicates an advancement in product offering that can attract more users and improve conversion rates, potentially increasing transaction-based revenue.
  
• Tripadvisor's marketing strategy shift towards lifetime value (LTV) based bidding and mid-to-upper funnel engagement is designed to acquire and retain more profitable users, hinting at improved marketing efficiency and better allocation of advertising dollars, which could enhance net margins and earnings prediction over time.
  

Assumptions

• Analysts are assuming Tripadvisor's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $115.9 million (and earnings per share of $0.85) by about October 2027, up from $24.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $194.6 million in earnings, and the most bearish expecting $50 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.6x on those 2027 earnings, down from 86.5x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Risks

• The transition from legacy offerings such as hotel meta, which has experienced ongoing pressure, to more diverse and sustainable models may impact near-term financial performance and lead to revenue volatility until the new initiatives fully take off and stabilize.
  
• Increased competition, particularly in hotel meta and experiences channels, could lead to weaker demand and lower paid click volume, impacting revenue and margins in these crucial segments.
  
• Reliance on algorithm changes by major search engines may lead to significant impacts on free traffic, affecting the financial performance in unpredictable ways and possibly leading to reduced visibility for Tripadvisor's offerings.
  
• The focus on moving users to an app-based and logged-in member model, while beneficial in the long term, requires significant marketing and product development investment, which could strain margins and cash flow in the near term if the transition does not scale as quickly as projected.
  
• External macroeconomic challenges and geopolitical tensions, alongside observable shifts in travel behavior like narrowing international booking windows and moderated pricing, could introduce volatility and unpredictability in travel demand, potentially impacting revenue growth and making it harder to forecast future performance.

Valuation

• The analysts have a consensus price target of $17.94 for Tripadvisor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $115.9 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $14.97, the analyst's price target of $17.94 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.