KEY POINTS
- CPC RECAPTURE ANALYSIS DOESN'T ACCOUNT FOR MOBILE/FX: We agree, which is one of the reasons why we originally flexed our analysis based on percentage of recapture rather than assuming full recapture. TRIP doesn't need full recapture to beat consensus revenue estimates for its core Hotel segment this year, even without any hotel shopper growth, which is unlikely even before considering TRIP's planned ramp in ad spend.
- MOBILE IS A SECULAR HEADWIND: Only if mobile hotel-shopper mix is growing. We estimate that mobile mix has been holding steady near 33% of its hotels shoppers over the past 3 quarters. If that were to continue, the mobile headwind all but goes away by 2Q17. Further, shopper mix could start shifting back toward desktop since that will likely be the focal point for TRIP's increasing ad spend, which would result in an incremental tailwind to revenue/hotel shopper.
- TRIP IS GOING TO MISS ON EBITDA: Maybe, but that's up to TRIP. The only reason why EBITDA would be under pressure this year is because TRIP is planning to reinvest all of its incremental EBITDA growth back into marketing. Otherwise, it wouldn't take much for TRIP to deliver double-digit EBITDA growth this year. So if TRIP misses EBITDA, it likely means an even bigger revenue beat; we suspect the street to will weight the latter over the former if that were the case. The other risk could be an EBITDA hit from a potential TV ad campaign. But the sooner TRIP announces it, the sooner it gets baked into estimates, and the sooner it pushes the shorts out of the name once they realize there’s nothing left to play (if that even counts).
- TRVG HAS DISPLACED TRIP: Why? We're asking because we haven't heard any real basis, outside of what TRVG has achieved in the absence of real competition from TRIP on ad spend, which drives TRVG's entire model. Meta (price aggregation) is a commoditized service, so the only real competitive advantage in meta is 1) Ad Spend (TRVG) 2) Complimentary Services (TRIP). Now that TRIP is also ramping up ad spend, TRVG's competitive advantage will start to wane.
- META MARGINS ARE IN SECULAR DECLINE: This is one is simple. EXPE can't afford a race to the meta bottom. Put another way, EXPE is eventually going to make TRVG back off on its pace of ad spending. The timing of which really depends on TRIP. The more aggressive and the faster TRIP ramps up marketing spend, the sooner TRVG will be forced to back down. When that happens, TRIP will be able to pare back on its ad spend as well, creating the potential for EBITDA growth in the out quarters. We don't see this as a 2019/2020 event; we expect this to start in 2018, if not 2H17.
- TRIP IS OVERVALUED: Definitely if you're looking at it from an EV/EBITDA basis vs. the OTAs. But that has always been the case, and has only really mattered when TRIP fails to execute. However, looking at the space solely on an EV/EBITDA doesn't consider where each of these players fit within the value chain. Further, TRIP may be in the process of solidifying its position near the top of the funnel, which is becoming the most important part of the space (more on that later). Finally, TRIP’s EBITDA is artificially depressed given significantly higher ad spend this year; some of which won’t generate top line returns until later 2017 and 2018. EBITDA growth in 2018 should be impressive as top line gains leverage the already ramped up increase in ad spend.
CPC RECAPTURE ANALYSIS DOESN'T ACCOUNT FOR MOBILE/FX
Background: Our 2017 long case is about the growth potential from recapturing pre-IB monetization levels. However the pre-IB comps that we're using for 2H17 are for 2H14, when mobile was a lower percentage of shopper mix, and the DXY was much lower.
We agree, which is one of the reasons why we originally flexed our analysis based on percentage of recapture rather than assuming full recapture. TRIP doesn't need full recapture to beat consensus Hotel Click-based & transaction revenue this year, even without any hotel shopper growth. But we expect TRIP's plan to ramp up marketing spend will naturally help drive shopper growth, but could also help shift shopper traffic toward desktop since the focus of that ad spend will be in the performance-based marketing channels.
But for context, we estimate that the mobile ARPU headwind over the last two quarters was less than 5%. We estimate that it will be less than a 10% drag in 2H17 with respect to our recapture analysis vs. its pre-IB comps from 2H14. We also estimate that FX will be a 5-10% drag in 2H17 in the same respect. All said, that means TRIP is conceivably bound to an 80%-90% recapture in 2H17 assuming no improvements to shopper mix and/or FX. That would only be an issue if TRIP couldn't produce shopper growth this year, which is unlikely even before considering TRIP's planned marketing campaign.
MOBILE IS A SECULAR HEADWIND
Only if mobile hotel-shopper mix is growing. We estimate that mobile mix has been holding steady near 33% of its hotels shoppers over the past 3 quarters. If that were to continue, the mobile headwind all but goes away by 2Q17. Note that mobile mix could start shifting traffic back toward desktop since that will likely be the focal point for its increasing ad spend, which would result in an incremental tailwind to revenue/hotel shopper.
The lingering issue is that TRIP is going heavy with IB into its app (25% of its total traffic), so there will still be a lingering headwind from what will likely be a growing mobile monetization gap, but it's not likely to make a dent in TRIP's financials. We estimate the mobile represents less than 15% of TRIP's total hotel revenues, so the app percentage is likely in single digits, which basically means the mobile monetization gap would have to widen significantly to matter.
One other thing, there isn't enough data to suggest that desktop shoppers definitively declined in 3Q16. We get the math, but the only conclusion you can draw from it is that desktop-only hotel shoppers declined last year. TRIP can't accurately measure shoppers using both platforms unless their profiles are logged in across devices. That said, the rising mobile hotel shopper mix just means a rising mix of mobile devices accessing the service. All that said, that also means that TRIP's reported shopper metrics are inflated, so it's still possible that desktop shoppers did decline, but not to the magnitude that the consensus math suggests. But also note that desktop-only shoppers returned to growth in 4Q16 alongside TRIP's accelerating ad spend.
TRIP IS GOING TO MISS ON EBITDA
Maybe, but that's up to TRIP. The only reason why EBITDA would be under pressure this year is because TRIP is planning to reinvest all of its incremental EBITDA growth back into marketing. Otherwise, it wouldn't take much for TRIP to deliver double-digit EBITDA growth this year.
Reason being is that there is no cost associated with reinserting CPC inventory back into the user's clickstream, so all the revenue growth from deemphasizing IB this year would drop down to EBITDA. The focus of that incremental marketing spend will go toward the performance-based channels, which mgmt has suggested has a breakeven ROI. So the math would suggest that TRIP could conceivably double its revenue growth if it reinvests all its incremental EBITDA back into marketing.
We're not making that claim since it's a dumb assumption to make, but the point is that if TRIP misses on EBITDA, it probably means an even bigger revenue beat, and we already estimate that TRIP could beat consensus estimates just by deemphasizing IB alone (assuming no hotel shopper growth). That said, it's possible that mgmt may not reinvest ALL of its incremental EBITDA into marketing since it really doesn't need to edge out consensus this year. However, we would prefer TRIP to advertise as aggressively as possible (see point 5).
One other thing, we couldn't imagine any real backlash from the buy-side if TRIP winds up missing on EBITDA because it decides to move forward with a TV ad campaign. Quick question to current TRIP holders: Are you really going to freak out and sell if TRIP announces the TV ad campaign? (We’re serious, let us know). Also, it appears that the street expectation is for a $100M TV ad campaign. What if it’s more in line with past campaigns ($30M-$50M)? Regardless of the amount, the shorts are out of catalysts once it’s announced; we expect any resulting pressure on the stock would be short-lived with short interest at nearly a 3-yr high.
TRVG HAS DISPLACED TRIP
Why? We're asking because we haven't heard any basis for which outside of what TRVG has achieved in the absence of real competition from TRIP on ad spend, which drives TRVG's entire model.
The truth is there really isn't a competitive advantage in meta (price aggregation is a commoditized service). Most of the meta user interfaces are largely identical. The major players are pulling pricing from the same +200 websites, which doesn't really matter since PCLN/EXPE already have all the inventory worth having, and are bidding against each to be the featured OTA in the top meta slots. TRVG may be have a broader hotel inventory, but the bulk of all travel occurs domestically and we doubt most consumers are shopping on page 19 in meta search (note that the number/frequency of meta ad placements thin out the farther back you go).
All that said, the only real competitive advantage in meta is 1) Ad Spend (TRVG) 2) Complimentary Services (TRIP). Now that TRIP is also ramping up ad spend, TRVG's competitive advantage will start to wane.
META MARGINS ARE IN SECULAR DECLINE
This is one is simple. EXPE can't afford a race to the meta bottom. Put another way, EXPE is eventually going to make TRVG back off on its pace of ad spending.
TRVG's ad spend has been growing as a percentage of EXPE's ad budget, now representing an estimated 20% of EXPE's Direct S&M Expense, which is EXPE's largest line item by a country mile. Remember that TRVG has limited EBITDA margins at best, so the more money EXPE throws toward TRVG's marketing budget, the more pressure it will put on its own EBITDA margins. Further, the yield off of TRVG's incremental ad spend will naturally start declining as TRIP ramps up its own ad spend alongside TRVG. Also keep in mind that EXPE has other kids to feed. AWAY is about to comp past the implementation of its model conversation, so EXPE will need to put more assets behind it to drive its top-line. EXPE's OTA properties still need to compete with PCLN, which has no problem ceding margin (via ad spend) to win over room-nights.
Long story short, EXPE can't continue allocating an increasing percentage of its ad budget to what may be its lowest-margin subsidiary when it has larger problems to deal with. TRVG is going to have to back down. The timing of which really depends on TRIP. The more aggressive and the faster TRIP ramps up marketing spend, the more pressure it will put on TRVG's advertising efficiency, and the more likely that EXPE puts TRVG on a timeout. When that happens, TRIP will be able to pare back on its pace of ad spend as well, leading to margin expansion. We don't see this as a 2019/2020 event; we expect this to start in 2018, if not 2H17.
TRIP IS OVERVALUED
Definitely, if you're looking at it on an EV/EBITDA basis. TRIP’s EBITDA is artificially depressed given significantly higher ad spend this year; some of which won’t generate top line returns until later 2017 and 2018. EBITDA growth in 2018 should be impressive as top line gains leverage the already ramped up increase in ad spend. TRIP may look expensive vs. the OTAs but that has always been the case, and has only really mattered when TRIP has failed to execute. However, looking at the space solely only on an EV/EBITDA basis is myopic, and doesn't consider where each of these players fits within the value chain, which is largely commoditized b/w search and the hotel. There is very little differentiation among any of the meta players, and the same can be argued for the OTAs.
But TRIP has real asset value in its reviews; sounds stupid to emphasize something that is seemingly so trivial until you consider the end product. There may not be a more differentiated service than a hotel property given the multitude of factors that distinguish them from one another. Further, hotels are also a relatively expensive service with elevated risk to the consumer since you don't really know what you're going to get until you arrive. The size and trajectory of TRIP's review count suggests that it basically has a monopoly in this respect.
Further, meta is actually the preferable model from a monetization perspective. The OTAs are effectively bidding away their commissions on meta, which means meta effectively gets the take without assuming the conversion risk. TRIP also has a unique opportunity in front of them, which is better monetizing the traffic it already has. TRIP recently disclosed that it isn't monetizing the majority of its hotel shoppers, which means most are just visiting hotel pages on its site for the reviews/content. That said the bulk of TRIP’s opportunity lies in monetizing its existing traffic vs. the remainder of the industry whose growth is largely sourced through traffic acquisition, which they have to compete for.
The only thing standing in the way of that opportunity for TRIP really comes down to branding, which would be the purpose of its TV ad campaign. If TRIP can steer more of its existing users into its own meta, then it gains that much more leverage over the industry as OTA competition intensifies (more on that later).
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
