I first learned about Tripadvisor (NASDAQ:TRIP) when looking through some Liberty Media filings and noticed that Liberty TripAdvisor (NASDAQ:LTRPB) owns a majority stake in the company. TRIP is trading at all-time lows and generates continuous free cash flow in normal economic times, so a closer study is necessary to see whether the current share price provides an acceptable margin of safety. I believe shares are trading at a discount to fair value if the company can revert to historic cash flow generation and grow slightly over the next few years. However, macroeconomic headwinds continue to loom, so conservative investors may want to wait and see how this will influence a company that relies on discretionary expenditure. At this time, I believe a neutral rating is appropriate for TRIP stock.

The Company

TRIP’s main business is its website and mobile app, Tripadvisor, which attracts traffic with its vast number of reviews and recommendations for travel experiences. When traffic is directed to their clients, the company sells ad spaces and collects affiliate fees. I truly enjoy utilizing this website and mobile app to gather ideas for places to visit while visiting a new place, as well as to read restaurant reviews.

Surprisingly, I’ve observed that the corporation performs an excellent job of driving engagement on its social media platform. On Twitter, the company has over 3 million followers and is always posting intriguing travel-related messages with links to its website. This, I believe, contributes to the company’s reputation as one of the best websites to visit while arranging a trip. I believe its review database and travel content provide some kind of moat, albeit a limited one given the number of competitors.

TRIP also has two minor portions, the first of which is Viator. Viator earns money when customers book activities such as tours and other attractions through its website. I can see how this adds value to consumers by providing lists of top-paid things to do in major holiday destinations, complete with reviews. I had never heard of this website before researching this company, but I may utilize it in the future. This segment appears to be increasing significantly, generating $493 million in revenue in 2022, with growth depicted below:

TheFork, a restaurant booking platform largely focused on the European market, is the final part. This is the smallest revenue category, with $126 million in 2022, and has not seen the same level of growth as Viator.

Recent Business Experience

TRIP looks to run a very dull, slow-to-now-growing business, with huge disruptions coming as a result of the coronavirus pandemic’s impact on travel. Revenue recovered slowly in 2021 before taking a more aggressive climb in 2022. This is illustrated below:

I recently examined Yelp (NYSE:YELP) and found that the company’s stock-based remuneration was far too excessive to warrant an investment. TRIP, on the other hand, is hampered by high stock-based pay, but it does leave a significant amount for investors during good years. 

Though stock-based compensation decreased in monetary terms in the most recent year, the stock price is low compared to 2021, therefore real shareholder dilution is unlikely to have improved year over year.

Valuation

I took a conservative approach to value, assuming that free cash flow, net of stock-based compensation, would fall to $200 million this year. For context, the company recorded nearly $100 million in free cash flow in the MRQ, net of stock-based compensation, however much of this was due to working capital changes, suggesting that this may not be sustainable. I then projected that the company would be able to expand free cash flow by 10% per year until 2027 when the consumer would hopefully recover and that it would have a 2% terminal growth rate in addition to inflation. Given the industry’s severe rivalry, a greater terminal growth rate is most likely incorrect. At the time of writing, this represents a $3 billion fair value for the company or a 20% upside. 

Macroeconomic Headwinds Risks

TRIP is strongly reliant on consumer discretionary spending and has already had a difficult few years as a result of the epidemic and the resulting poor revenue recovery. Revenue was able to rebound in 2022, but this may not be the case if the economic situation worsens and the consumer is weakened. Our financial estimates would be considered overly optimistic if the company did not become cash flow positive in the near term.

Competition

TRIP faces numerous competitors, including large tech giants such as Google (NASDAQ:GOOGL) and smaller players such as Expedia (NASDAQ:EXPE) and Yelp, to mention a few. In order to recruit clients, the company would most certainly need to spend on promotion, and the MRQ recorded a 5% increase in selling and marketing expenses year over year.

Maturities of Long-Term Debt

Though the company appears to have enough liquidity with $1.1 billion in cash on the balance sheet, long-term debt maturities in 2025 and 2026 are $500 million and $345 million, respectively. If the corporation needs to pay off debt or refinance in a higher interest rate environment, this could reduce shareholder profits.

Conclusion

Although our models show that TRIP is trading at a minor discount to our $3 billion fair value estimate, there is currently a high level of macroeconomic uncertainty. The company relies on a healthy consumer for discretionary spending, and any weakening would have a significant impact on our free cash flow forecasts. Furthermore, there is a lot of competition for market share, and the corporation must spend a lot of money on advertising to be competitive. Having said that, I believe TRIP has carved out a recognized brand for people interested in learning about major travel destinations, providing the company with a little moat. Given these considerations, I rate the stock as a hold for the time being.

Featured Image: Pexels @ Ketut Subiyanto

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