Opportunities in Online Travel

The $1.3-trillion worldwide travel industry is in a state of flux. In addition to the broad trends that have been sweeping through the industry (including the transition to more online transactions and the rise of Airbnb in alternative accommodations), travel companies over the past several months have had to deal with increased terrorism, the Zika virus and slowing global economies. Sentiment surrounding travel-related stocks has turned overly negative. But ongoing disruption across the segment should eventually lead to better opportunities for investors via more attractive valuations.

Look for lodging over the near term to continue to be weighed down by a variety of challenging factors. However, the headwinds are temporary, not permanent impairments. The long-term secular trend remains healthy, as travel demand tends to be very resilient. Consumer and business travelers are doing more of their research and transactions online (and on mobile) because of the convenience factor. Yet, less than 40% of travel-related spending today takes place online, leaving a lot of room for expansion.

In the past, anyone looking to plan and book a trip online had to visit anywhere from 10 to 20 different websites in order to gather background information on various destinations, compare prices for hotels/airfare and actually complete the transaction. Online travel agencies (OTAs) have alleviated many of the pain points when it comes to making the online experience more manageable and pleasant. But there is still plenty of work to be done, especially involving trips booked on mobile devices.

Travelers more than ever are demanding one-stop shopping when it comes to the online experience. The younger demographics in particular want to research a destination, discover what others have to say about specific cities/locations and find the best hotel/airfare rates all on one site. Convenience is key—it’s what makes people come back to an online travel provider again and again to book their trips.

TripAdvisor (TRIP) is a significant player in online travel, focused on trying to solve inefficiencies in the marketplace. The company’s main goal is to be the perfect travel companion by offering 320 million user reviews/opinions covering nearly 1 million hotels/accommodations, 770,000 vacation rentals, 3.8 million restaurants and 625,000 attractions. Partnering with Priceline (PCLN) and eight of the 10 largest hotel chains, TripAdvisor’s new Instant Booking feature gives users the ability to book 450,000 hotels directly from its website.

Shares of TripAdvisor now trade around $60, down 46% from the all-time high of $111.24 reached in June 2014, and off 36% from the 52-week high of $94. At the recent market cap of $8.7 billion, the valuation—5.3 times the 2016 consensus revenue estimate of $1.64 billion—is getting more reasonable.

TripAdvisor has 350 million monthly unique visitors. Users are drawn to the site’s expanded content, which is most useful for trip planning. TripAdvisor now gets 200 contributions per minute, up from about 30 back in 2011. In 2015, 83 million contributions were added to the TripAdvisor platform.

The company generates about 72% of its revenue from click-based ads and display ads positioned alongside its content, with the remainder coming from subscriptions and commissions associated with transactions.

In 2013, TripAdvisor solved the price-comparison dilemma for travelers when it added hotel metasearch capabilities, enabling users to find all of the best prices across more than 200 different booking engines online.

Two years ago, TripAdvisor rolled out its Instant Booking button in the U.S. and U.K., improving its transactional capabilities and increasing its commission revenue. In the fourth quarter of 2015, Instant Booking was expanded to nine more countries. The feature is now available in all of the major European markets. Next month, more Instant Booking countries will be added in Asia and Latin America.

With Instant Booking, TripAdvisor benefits from higher repeat bookings, better mobile monetization and a reduction in churn (users leaving the TripAdvisor platform to complete transactions on another site).

TripAdvisor expects Instant Booking to be a drag on earnings in the year ahead because of the costs associated with getting the feature fully up to speed. That includes improving room-level content on the site—adding more photos and detailed room descriptions. Better-informed users are more likely to book a room using Instant Booking because they have more confidence in the level of accommodations.

Instant Booking has been a success on mobile devices, where TripAdvisor generates 53% of its monthly traffic. The feature offers ease of use on smaller mobile screens, and that’s driving strong repeat bookings on mobile. In the U.S., Instant Booking already represents more than half of all revenue on the company’s mobile app, which has been downloaded 290 million times.

Smartphone-based hotel shoppers in the latest quarter represented 30% of TripAdvisor’s total hotel shoppers, up from 19% a year ago. But mobile hotel shoppers monetize at just 30% of the rate of desktop/tablet users. TripAdvisor has been boosting mobile monetization rates by offering improved features (such as Instant Booking) and a better overall user interface. Last year, the company’s average mobile revenue per shopper advanced 30%.

When it comes to the $100-billion alternative accommodations market, privately held Airbnb is emerging as a powerful provider. However, Guggenheim Securities argues Airbnb is not currently positioned to steal away the traditional OTA hotel customers. Cowen estimates Airbnb will only have cannibalized about 200 basis points of lodging industry growth by the end of 2016. TripAdvisor has a solid presence in alternative accommodations via its portfolio of nearly 800,000 vacation rentals, 70% of which are now bookable online. In 2015, 65% of TripAdvisor’s vacation rentals revenue came from its free-to-list model, with the company taking a commission on completed transactions.

In the current turbulent market environment, Expedia (EXPE) stands out as an online travel company with a strong portfolio of branded offerings (including Hotwire, Hotels, Orbitz, Travelocity and Trivago), a superior growth profile and a low relative valuation. In December, Expedia closed its $3.9-billion acquisition of HomeAway, putting it in direct competition with Airbnb in alternative accommodations.

Expedia has a diversified business, with its international segment accounting for 44% of total revenue. For 2016, analysts on average expect Expedia’s top line to advance 33% to $8.87 billion. Recently trading at $102.25, Expedia shares are down 27% from the all-time high of $140.51 reached on November 5. The stock now trades at 19.2 times the 2016 consensus EPS estimate of $5.32, vs. the peak forward P/E of 22.4 from last fall.

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