Digging into an owner-operated travel company set to dominate the experiences and dining segment amid the COVID-19 turmoil.

History
Tripadvisor (TRIP) was started by Stephen Kaufer, current CEO, and his co-founder Langley in 2000 in Boston. Kaufer is a product engineer by background and that ethos seems to be embedded into TRIP’s culture. 

"We do not have ‘architects’ – at TripAdvisor, if you design something, you code it, and if you code it you test it. Engineers who do not like to go outside their comfort zone, or who feel certain work is “beneath” them will simply get in the way.” In other words, there is a certain style of developer required to fit into the TripAdvisor culture – someone who is focused on building great products end-to-end, just like the CEO is." - 2012 HBR article. 

TRIP started out with $4M in VC funding and the initial idea was on the B2B channel. 

"Kaufer wanted to take his hardcore engineering skills and apply them to vertical search in travel. That is, build a massive database of travel information that provided a white label search engine for travel sites like Expedia and Travelocity.”

Long story short… that didn't work out… Kaufer went back to his investors and suggested a B2C play… by that point, they had spent much of the money and the investors had nothing to lose so they said ‘go for it’. 

The B2C pivot first started with trying to use banner ads using a click-through rate (CTR) model but that didn’t work so they pivoted again to a cost per click (CPC) model instead. This worked and TRIP was bought for $210M cash in 2004 by Barry Diller at IAC/Expedia. 

After building out further within Expedia, it was later spun out in late 2011 at $4.8B market cap and at that point, Expedia comprised about 1/3 of its revenue. TRIP was the metasearch to Expedia, (like Google is for Booking, Expedia and other OTAs).

In 2012, Liberty Interactive bought a controlling position in the company from Diller. That leads to today where TRIP is considered the world’s largest online travel community/platform. With ~460M monthly visitors browsing through ~850M reviews of accommodations, restaurants, experiences etc.. 

What Does It Do?
I view TRIP as a travel content site that currently generates profits off of a legacy hotel auctions business for OTAs and it’s currently trying to leverage its large community to build out a service pool in experiences and dining, away from its legacy business of hotels. 

For travelers, it’s the site you go on to read reviews on hotels, experiences etc… from other travelers. They also have a ‘forum-like’ function for people to ask questions. Kind of like Reddit, with various reviewers/moderators with ‘ranks’ that signify their contribution level to the community. 

Travelers can also directly book the hotels/experiences etc.. For hotels, it provides various options to its OTA partners. So if I look at “hotel A” there will be prices from Expedia, Booking etc.. and I’ll click through to arrive at the OTA site. That’s the hotel auction business that TRIP’s been making money on. This segment has been renamed as Hotels, Media & Platform (HM&P) and it accounts for 60% and 62% of respective 2019, 2018 revenue. It also accounts for 86% and 78% of respective 2019, 2018 EBITDA. It’s been, and still is, the main generator of free cash flow. 

HM&P has expanded from just hotel auctions to incorporate display and platform advertising as a B2B ad channel for hotels. About ~45% of the auctions business relies on Booking & Expedia so I imagine they are trying to diversify their customer concentration in this part of the business. 

Experience & Dining (E&D) is the other segment. It accounts for about 29% and 23% of 2019, 2018 revenue and has been the segment growing at 23% and 40% from 2017 to 2019. E&D is where the opportunity lies. Management expects E&D to pull ahead of the hotel auction segment in 2020 (well… probably a later date now, given COVID-19). E&D currently has lower EBITDA margins than the HM&P business at some low teens level. 

TRIP entered into the E&D region with the acquisition of Viator (5 years ago) in the experience booking channel and a series of acquisitions like TheFork and Bookatable to build out the restaurant booking side. Both are platforms that allow travelers to book tours/experiences/restaurants from the TRIP website. It’s if Opentable and Get Your Guide were all assimilated on one platform. TRIP takes a cut of the experiences that are booked on Viator (it’s not a fixed price but it seems the rate is about 10-20% of the price). 

TRIP currently has 345K bookable products on its experience platform and 84K restaurants on its dining platform, making them the largest experience booking platform AND largest online restaurant booking platform. TRIP already has 5.2M restaurants reviewed on their platform so they are looking to integrate them further into its existing database. 

In regards to experiences, it’s estimated to be a $183B market (per Phocuswright) with ~20% online penetration and TRIP is considered the leader in most regions it operates in for experience booking as Skift estimates it has some 55% market share of online experience booking market with some 300K+ options while the closest second is Get Your Guide at 20% market share with 20-40K and 12% for Expedia. 

So TRIP is practically a market place that connects travelers with accommodation, experience and dining options. It went from ~65M monthly unique visitors in 2012 when it spun out to ~450M monthly unique visitors in 2019 to become the world’s largest travel website. As they are selling “online space”, it’s been a profitable business with 10-year average gross margins north of 95% with 20%+ ROIC. 

It has done a solid job in providing value to customers in that regard. But one can maybe suggest that its comparably smaller revenue and profit numbers compared to OTAs like Booking.com demonstrate the company’s inability to monetize the demand. 

What’s indeed favourable is that TRIP has focused on acquiring demand instead of supply (like OTAs do). OTAs focus on aggregating hotels onto their site and rely on metasearch companies like Google (and to a lesser extent TRIP) to funnel customers to their site. 

As Kaufer has touted in recent interviews, he wants people to come directly to TRIP instead of going from Google to TRIP. The latter may get harder in the future anyways with Google cracking down on SEOs. The short version is that Google won’t be allowing organic SEO to float to the top and will be prioritizing its paying customers for top results (i.e. Booking.com). I would refer you to Ensemble Capital’s excellent article on Google and Bookings relationship and Stratechery’s article on Google’s role in the OTA/Travel world for further information.

My 2 Cents as a User.
I know it’s a cardinal sin to ever assume that you are an example of an average customer… but using E&D services has been a growing part of my own travel routine. When compared to my peers I would be on the spectrum of a frequent/seasoned traveler. 

I became a major fan of Get Your Guide in 2019. I had the option of using TRIP’s Viator but opted for Get Your Guide because it had less bloggers linking their sites to it and…. I felt I could trust the site more… purely based on how it looked. Back in 2019, I had no idea TRIP owned Viator… maybe if I used the TRIP mobile app, this might have been clearer. 

Despite being an avid traveler… I seldom find myself using TRIP. I do find my questions do get answered on TRIP but I’ve never gone into its site directly. I usually rely on Google to take me to bloggers who answer my question… for some reason I trust bloggers who will write 1000 words on the topic than 20 people talking about it on a forum. So… I was naturally interested in the experience booking segment because it was making a material change/difference in my own travel patterns…. And it got me thinking if TRIP had any kind of moat to signify it to be a good business. 

What is the Moat… if any?

“Most people assume I am an avid traveler who would like nothing more than to roam the world for three months,” he told the New York Times. “Not true. The company was born of an average traveler’s desire to plan a great trip for a precious week or two of vacation time.” - Steve Kaufer

The idea is that travel is special. Most people don’t get to work remotely and be a digital nomad. They get 2-5 weeks of travel time a year and most people want to maximize their time traveling. With vacation time being a true ’scarcity’ for the average traveler, the desire to make the ‘right’ decisions… to not have a disappointing… wasted trip is probably high. This is where research is important and this is where platforms with lots of reviews are important. This is where travel metasearch sites like TRIP and Google provide value to travelers. 

With over 850 million reviews on its site, TRIP provides value to customers beyond mere execution of bookings. It provides information. It has built trust with millions of its users on the validity of the reviews. Of course there are forged fake reviews. Any global site that is the no.1 source of reviews will have bad actors. Where else are you going to go though? TRIP has responded by partnering up with travel blogs that write in-depth posts for their followers and that seems to be a stronger builder of trust as well. These blogs will then link experiences and dining booking links back to TRIP. 

Overall, with a net promoter score (NPS) of 46, TRIP seems to be delivering on its customer value prop. Generally, an NPS of >0 is good and ~50 is excellent/outstanding. Amazon’s NPS is 25, Facebook’s is -21.. yes that’s NEGATIVE 21… and Expedia is 3. 

TRIP has built out a network effect where more people post reviews and that reinforces the value of the site. More reviews. Timely reviews are valuable to travelers and the longer TRIP can keep people on the site and eventually convert them to book experiences on their platform, the stronger it will get. 

Much like how hotels had to slowly get accustomed to the idea of getting ‘reviewed’ on travel sites and realizing how positive reviews make a major impact to customers choosing them (reviews were considered the most important decision making metric for consumers with 52%, price was second at 48%). Reviews have become a social norm. This transfers over to dining and experiences as well. In 2019, TRIP’s CFO noted how the app is focused on helping travelers for ‘in-destination planning.’ This makes it ever more imperative that travelers have easy-access methods for selecting options in a timely manner that is convenient and trustworthy. Not many can offer all these factors with the large amount of options that TRIP provides. 

So yes, as TRIP gets more reviews, more bookable products, it becomes a more convenient and reliable platform for travelers. Though… there isn’t a particular stickiness or recurring nature to the business. Assuming most people travel once or twice a year, you won’t be going to the site too often. But, it is a site with a singular homogeneous purpose so… as long as all the world’s growing number of travelers continue to come upon the website, it will have a recurring level of traffic. 

Much of TRIP’s traffic is reliant on SEO exposure. Cowen research noted how some 30% of TRIP’s business is exposed to SEO compared to 7% for Booking and 10% for Expedia. I imagine the low % for Booking and Expedia is because they don’t rely on organic SEO traffic but get most of the traffic through paid marketing to Google. No doubt, this reliance on Google’s SEO is a big risk and TRIP’s hotel business felt the pain of it near the end of 2019 when Google changed its SEO ranking procedure that killed much of the TRIP organic traffic.

OTAs pay for their spots now and that’s how they fight the impact of SEO. Maybe that creates a symbiotic relationship with Google. But you never want to have one company control your demand funnel. TRIP has responded with Kaufer saying how the goal is for people to go directly to TRIP for everything travel… much like people go to Amazon directly to buy books and essentials. If this happens…. It can be very powerful for TRIP… but for the time being, it seems that they haven’t reached their independence from Google just yet. 

If I were to put a finger on it… TRIP’s moat would be on the mix of network effect and scale. Scale in regards to the number of reviews and bookable products it has for its new business segment. The network effect is the existing moat that has produced the current business that generated a good amount of free cash flow on the HM&P side. But for TRIP to become a dominant player in E&D… the untapped market…. It’ll need to leverage the existing network effect and transfer it into building out scale in bookable products. The more products it has on its platform, the more convenient (ergo sticky) it would be for customers and that would lead to possibilities for pricing power. They are currently the market leader in their E&D segments but I shy from saying they have some commanding position.

They are trusted, they are often visited and they are large. I do believe they have a moat. But I don’t know if they have much pricing power… which makes me believe that though the moat exists (current network effect having delivered formidable returns on capital)… it needs to widen it further to make it durable as that’s been tested once in 2019 by Google. 

Execution will be everything in widening the moat and that leads to management and culture. 

What kind of management situation is this?
Really, the story of TRIP is a reliance on Kaufer to execute. It’s a weird situation though because although Kaufer has been with the company he co-founded for 20 years…. the last 16 years have had him report to a controlling leader from Barry Diller at IAC to John Malone/Greg Maffei at Liberty.

Diller and Malone’s reputation as prudent capital allocators and value creators is quite well known in the investing community. An investment thesis in TRIP would incorporate a positive point to having TRIP under the Liberty umbrella… assuming there will be capacity to allocate capital for long term growth. 

But I also wonder whether this is indeed a good thing… because I would want the founder be the person running the company but it seems like Kaufer’s always had a kind of puppet master above him. It’s a situation I can’t seem to make out entirely… and I do believe Maffei would think about the success of the greater Liberty umbrella of companies as Liberty TRIP is one of many companies he is overseeing. 

In relation to ownership, Liberty TRIP Holdings has 57.5% of all votes and about 29% of all outstanding shares (assuming conversion of the class B shares). This is all under Maffei’s supervision. Kaufer has 1.4% of the common stock. Jay Hoag, a VC and board member, has slightly greater ownership at 1.6% and all executives/directors have a combined ownership of 3.5%. Overall, it’s a rather disappointing number to see from the founder/CEO. 

When asked about what he would do with his long-term future in a 2019 interview, Kaufer said he would stay until the board kicked him out or if he found a better project to do. He noted his focus was to make TRIP become the place customers went to directly for everything travel. When not on earnings calls, Kaufer rarely speaks about financial figures. Maybe this is why his shareholder letters seem so scripted and dull… it reads off like some IR report. But when he is speaking at travel conventions he is zoned in on creating this whole experience for customers. Maybe I’m biased but I see a product-guy. For a company that needs to dominate an industry, I think a product mindset is quite important.. more so than a financial one. That will be needed later. 

This product-focused ethos seems to be related throughout the culture at TRIP. Kaufer has “Speed Wins” on a handwritten paper taped to his door. No fancy plaque. Just some printer paper. And several reviews on TRIP’s culture note it’s all about “Speed”. It’s an ‘engineering-centric’ culture. 

"It seemed like a good deal at the time – as Kaufer told Harvard Business School’s student newspaper in 2013, none of the founders were previously wealthy, so the windfall was a “life-changing event”. But he eventually regretted selling out so early on: “In hindsight, this was the stupidest move I ever made!”

Not sure what Kaufer would’ve said if he was pushed on why this was stupid. Maybe it’s giving up control? Maybe it’s a poor experience on executing on his vision? I’m not sure. But I see it as a positive that he sees selling as a mistake and I’d imagine that would be further motivation to building out TRIP. 

Acquisition is another part of TRIP’s growth strategy. Whether it be big recent ones like Viator and TheFork or the past ones that no one knows of now. Same as in his 2012 interview, Kaufer stayed consistent in what he said in 2019.. which is that TRIP focuses mainly on ’tuck-in’ acquisitions but more importantly, that TRIP lets their acquisitions operate in a distributed manner. Kaufer says all companies need “CEO Love”… where the team and acquired company are (in many cases) acquired for the talent as well as the product. Sometimes it’s mainly on the talent of the team. Kaufer recognizes the importance of allowing such teams to exist and thrive and even if the acquisition of the product isn’t successful, the team will stay intact and sometimes even become a full department.. that’s how their mobile app team came into being. 

In regards to compensation, annual bonus is determined by revenue and adjusted EBITDA targets. The major part of the adjusting is the subtraction of stock-based compensation. In the 2019 adjusted EBITDA of $438M, stock-based compensation was $124M… 28%. I don’t think this should be adjusted out at all. You could honestly pay people more in stock than salaries and bump up hitting 'targets’. 

The median employee pay in TRIP, excluding Kaufer is $101K in 2018.. and his compensation was $1.9M (combination of base salary $800K + annual cash bonus $1.1M). Kaufer currently is on an employee contract that was extended from 2019 to 2023. Kaufer received a $45M equity compensation in 2018 in forms of stock options/units mix with the units and options equally paid out over a 4 year vesting period. There were no particular metrics other than total shareholder return levels for the market-based units… which incentivizes increasing the share price. Of course, I like to see the share price increase…. But unfortunately… despite TRIP being operated by a founder…. I just can’t help but feel a little shortchanged… and it seems like a rather mediocre/average management situation for the average US publicly traded company. 

Maffei & Malone on Top
Sure, Tripadvisor is under the Liberty Media brand and Malone has made tons of investors rich and hence “Generic Value Partners LLC” is fraught with pieces of the Liberty complex. But in 2015, Malone transferred his voting control over to Maffei. Looking through Maffei’s focus from what he says in interviews and the Liberty Media conference calls…. TRIP seems to be a small focus for him. In 2019, Maffei referred to TRIP as a FCF business rather than a growth-oriented business. 

That admission by Maffei is rather disappointing given the opportunities in E&D but maybe he is tired of the series of…. Not-so-promising execution by Kaufer? Who knows. But don’t think there is a Malone-Liberty premium. 

Capital Allocation Concerns
In 2019, $488M was used for a special dividend and $87M for share buybacks. The dividend was most likely to help Liberty Tripadvisor given the holding entity’s leverage situation.

This brings to the point that Kaufer, though Founder & CEO, is very much under Greg Maffei and capital allocation decisions may very well be influenced by Maffei’s plans relating to the entirety of Liberty Media companies he is responsible for. Regardless, the act of a buyback seems rather silly when the business should be pushing to reinvest back into the business to grow the E&D segment. 

If the business had some durable/amazing moat like MasterCard, then sure… go ahead and buyback some stock… but TRIP is in the process of building out dominance in a new business line and I would hope that’s where capital is being reinvested. If they were doing the buyback because the shares were undervalued and/or the opportunities for reinvestment were not present… management did not communicate it. 

Still.. they have $319M in cash and no o/s debt so… a solid enough balance sheet for the hard times in 2020. They also have $1.2bn in undrawn revolving credit facility as well. If they were to pursue M&A during the tumultuous time in the travel industry today… they seem to have ample ammo. But so does Booking.. who is also focusing in on building out their E&D business to provide a holistic experience (they’ve got their Didi and GRAB partnerships to take you from your hotel to that E&D destination too… though I question the long term survivability of Didi and GRAB). Maybe it will be the Liberty dealmakers vs. Fogel of Booking and the newly reappointed Chairman of Expedia, Diller duking it out in the travel M&A sphere.

The meta-strategy would be for Booking to acquire TRIP… and have both entities further pursue acquisitions to make one giant travel company. Whether that kind of merger would get approved is a different story. But GreenWood Investors presented an interesting view on the takeover option. It provides a kind of long-tail opportunity I think. Which brings me to how I would look at the intrinsic value of the business. I didn’t go into it in detail but there is also the JV with China’s trip.com that also has some long-tail opportunity but I didn’t see it as a material part of the business… yet.

Valuation
Simply… the E&D business is not contributing much in regards to the FCF at the moment. In 2019 it was close to negligible at sub 5% EBITDA margin. So 2019 FCF was about $341M and normalized over the last 4 years (to account for the shifting strategy of E&D acquisition and limited growth for HM&P) the FCF is about ~$300M from the HM&P engine. FCF started declining after 2015 (with the share price)… so this might be a reasonable period to normalize for just a hotel auction business. So, at the current enterprise value of ~$2.3bn…. It’s a 15% FCF yield on the legacy hotel auction business using the normalized FCF. However, there is also a high possibility that we may only have Q1’s worth of FCF for the entirety of the year. If I assume a $80M FCF for 2019, that’s a 3% FCF yield. Not good at all. 

It’s hard to say when the industry will recover. However, I do not think TRIP’s competitive position would come out weaker out the crisis. Rather, I am optimistic the ample capital would be deployed to widen its moat further. Assuming FCF capacity is intact and will recover within 3 years or so, at today’s prices you get the E&D segment for cheap… I daresay….free. A business segment that has shown historic EBITDA margins of 10-13%, growing faster than the legacy business, a market with plenty of room for penetration and one TRIP is in a market-leading position.

For what it’s worth, I think the recovery of travel will be faster for leisure than it is for business. I think business travel, primarily in the US, will be slower to come back. TRIP’s value prop is focused on leisure travel and I think that will also allow the recovery to be more favourable than US-focused OTAs that rely on more business travelers. A thought on the holistic view of travel recovery. Nevertheless… a FCF yield of 3% to 15% on a business with a decent moat with the potential to eat up an adjacent segment seems enticing. Notice, the 15% FCF yield on the 2019 business doesn’t even account for growth.

I think the purpose of valuation is not to try and predict the future. Rather, it’s to try and estimate a level of margin of safety I would be comfortable with given the business fundamentals. I used to build massive multi-tabbed DCFs and over time…. I’ve realized how silly much of it seemed. Maybe it’s because my DCFs were no good because I’d be wrong over some 2-5 year period. Even Monte Carlos and sensitivities gave ranges but at the end of the day…. The simple Adam Smith definition of an investment is that which you allocate capital into to receive a dividend from… and the point of using FCF is to assess the current value of the yield and the margin of safety is determined through such a yield number and all the growth and good stuff that happens is the positive stuff you just can’t predict. At least.. that’s the thought today. This will probably change over time. 

10 Years from Now
In 2030, what would TRIP look like? Would it be around? 450M monthly users don’t just ‘disappear’ in a year of COVID-19…. Or would they? Maybe 1 year of COVID-19 stopping travel will put TRIP out of mind for people? But the hundreds of millions of reviews will always be there. Maybe people will continuously travel more and add more reviews because Trump told me ‘pent up demand is UGE.’ 

Honestly, I can’t say if TRIP would be around. This business existed for 20 years… so it may last another 20 years. If it succeeds in bringing on more and more experiences and dining options onto the platform, then I can imagine it becoming a core part of my annual travel experience. If they continue to partner up with travel blogs, I could see them continuing to exist in a ’non-obvious’ kind of way as well.

If I live my life my way…. I’ll travel more in the next 10 years. I think people will go on more adventures 10 years later than they did last year. The world will probably be more globally connected. The world will probably be wealthier. I think the industry trend is positive. But I cannot forecast with much conviction TRIP will be relevant. Though, I’ll make a prediction TRIP will outlast most OTAs (i.e. Expedia/Booking) unless one of them buys it out sometime in 10 years.