TripAdvisor (TRIP) Down 14% Today After Profits Slide

by Ryan Fitzwater, Director of Research, The Oxford Club

Travel website TripAdvisor (Nasdaq: TRIP) is getting hammered today after the company missed on earnings.

Wall Street expected earnings to clock in at $0.60 a share. But the website operator, known for its user-generated reviews of hotels, totally whiffed reporting earnings of just $0.37 a share after yesterday’s close.

Investors are now giving the company bad reviews as shares have plummeted more than 14% this morning.

Third Quarter Results a Mixed Bag

When you dig into the company’s earnings release, it is a mixed bag of good and bad news.

A surge of expenses pulled down TripAdvisor’s profits. Cost and expenses increased 58% in the third quarter.

But this isn’t just a TripAdvisor issue. This has been an industry-wide issue. Travel portals have increased their advertising spending, as well as have offered more discounts and loyalty programs, as more players have entered the field.

Travel sites rely heavily on click-based advertising. This quarter, 70% of TripAdvisor's sales came from click-based advertising.  And, unfortunately, this quarter the company saw “lower than expected click-based revenue growth,” according to CEO and president Steve Kaufer.

You already have major players like Expedia (Nasdaq: EXPE) and Priceline (Nasdaq: PCLN) battling for market share. Now apparently Google (Nasdaq: GOOG) is looking to enter the online travel market in the near future as well. Add on new startups that match travelers with people who are looking to rent out apartments or spare rooms, and you can understand the concern around increased competition.

But I mentioned a mixed bag of results, so let’s touch base on the positive news.

Viator Acquisition Helps Boost Sales

While click-based revenue growth was lower than expected, revenue actually grew in the third quarter and beat estimates as well. TripAdvisor reported sales of $354 million, a 38.8% increase over sales of $255.1 million during the same period last year, and well above Wall Street’s estimates of $348 million.

TripAdvisor's recent acquisition of activities booking and online tours provider Viator was the main factor behind the revenue boost. TripAdvisor bought out Viator in late July for $200 million, and mostly in cash.

And while Kaufer already mentioned that click-based revenue growth was lower than expected, it still grew at a 31% clip. Display-based advertising rose 13% over the same time frame as well.

Half of TripAdvisor’s revenue comes from North America, and that grew 35% compared to the same period last year. And it has been accelerating sales abroad as well. Latin American revenue grew 78% this quarter, and sales from Africa, Europe and the Middle East grew 43%. So clearly the company is doing a good job of penetrating international markets.

Time to Rate the Stock

Bottom line, even after today’s earnings slip the company is still well positioned for growth. Starting out as just a user-based review site, TripAdvisor has grown into a multibillion-dollar travel site that offers a diverse portfolio of travel products. You can easily plan an entire vacation through TripAdvisor, comparing rates for flights, hotels and vacation rentals from all the major travel sites, while simultaneously comparing genuine user reviews.

But as I already mentioned, increased costs and expenses due to growing competition is a concern. We just saw that problem effect the bottom line this quarter, and it could definitely be an issue going forward.

If you are confused that is understandable. Sales growth coupled with increased costs makes for a worried investor.

Let’s get some more insight on TripAdvisor’s financial health with our Investment U Fundamental Factor Test. Our unbiased test will give us a clear-cut rating on the stock from just a fundamental perspective, and help us avoid the impossible task of predicting the future that so many other experts, analysts and investors fail at.

Earnings-per-Share (EPS) Growth: You already know that TripAdvisor missed on estimates. It officially saw EPS drop 2.56% this quarter.

Price-to-Earnings (P/E) Ratio: Based on today’s discounted stock price, TripAdvisor’s P/E is 50.01. That might seem high, but compared to the industry average of 55.34, it is trading cheap on an earnings basis.

Debt-to-Equity : The company has a debt-to-equity ratio of 34.41%, which might seem low. But its peers are averaging 24.94%, so it is slightly overleveraged compared to the industry.

Free Cash Flow per Share Growth : Even after purchasing Viator for around $200 million cash, TripAdvisor was able to grow free cash flow 81.31% this quarter compared to the same period last year. Can’t complain about that.

Profit Margins Even after expenses took a big bite out of the company’s bottom line, profit margins are still in the double-digits. Its profits margins of 15.25% are more than double the industry average of 6.39%. A big check mark here.

 Return on Equity Return on Equity TripAdvisor closes our last metric on a positive note. Its ROE of 22.59% is well above the industry average of 14%.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

B: Buy with Caution (Matches four key metrics, no less)

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