City Insider: Where to next for TripAdvisor?

City Insider - FT journalist David Stevenson on the travel industry

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David Stevenson considers whether the growth of the reviews giant has reached its limits and asks ‘what’s on the horizon?’

It’s decision time for TripAdvisor and its public shareholders.

TripAdvisor is still a young public company but as 2015 drags into 2016, the reviews giant needs to impress the markets and institutions by showing it can still grow exponentially.

Dampen those high expectations and my money is on ‘Trip’ being snapped up within 18 months – with Google the increasingly obvious partner.

I would argue we’ve all become rather blasé about the rise of TripAdvisor. It was only founded in 2000 but in a short space of time has become the elephant in the room for the travel sector.

Its digital reach is truly awesome – it boasts almost 200 million reviews on 4.4 million places, with 150 million mobile download apps.

In reality, I would suggest TripAdvisor is probably one of the most-trusted digital travel brands in existence, inspiring loyalty among users (with frequent and constant review updating) that competitors can only dream of.

But TripAdvisor is also at a corporate crossroads. Spun off from Expedia in 2011 and listed in the middle of last year, Trip’s US listing is now six months old.

Crucially, its fourth quarter numbers published earlier this month gave us the first definitive view inside the travel giant – and of what it plans to do next.

To understand what might happen, it’s important first to understand TripAdvisor is highly rated by investors and thus vulnerable to earnings disappointments, especially as its shares have nearly doubled in value since the initial public offering (IPO) of 2014.

A $10-billion market cap and a price-to-earnings ratio of not far off 50 puts TripAdvisor up alongside massive tech giants in terms of market value.

That elevated standing is justified only if Trip can keep up its revenue momentum.

Third-quarter numbers back in November left many investors a bit jaded. In particular, the Q3 earnings numbers (net income of $54 million, up 4% year on year) were a little lower than many investors expected.

This month’s numbers were a tiny bit better, with revenues ahead of estimates. But again earnings numbers didn’t quite live up to expectations.

Trip reported Q4 EPS of $0.35, $0.02 worse than the analyst’s estimate of $0.37, although revenue was $288 million versus the consensus guestimate of $285 million.

My sense is that, after amazing growth over the last 15 years, the pressure is now on Trip to find new and exciting ways to carry on generating exponential growth – i.e. revenue growth.

Click-based advertising, a huge part of the existing revenue mix, is still growing steadily but is likely to become slowly less important – as will display advertising, where growth rates are significantly lower.

The great hope in terms of product lines is in subscription and transaction revenues, especially top-level deals with big hotel groups.

Growth rates in this segment are fantastic and likely to become ever more important. My guess is that if everything goes to plan they could rise from the current 20% to not far off 40% within three years.

At the core of this differentiated product offer is TripAdvisor’s Instant Book (IB) service which allows big hotel groups to seamlessly integrate their booking process with the reviews section.

Analysts at Deutsche Bank reckon that “84% of top-ranked US hotels have an option with IB as of late December, up from 58% . . . [and] when TripAdvisor increases the exposure of this footprint to a higher percentage of traffic, we expect it to be a positive impact on revenue per hotel shopper.”

But the Deutsche analysts also confirm that the ramp up isn’t incredibly fast for IB, especially outside the US, with no meaningful announcements around new IB partners in the last few months.

The other obvious growth area for TripAdvisor centres on international sales. Like its original parent Expedia – and its rival Priceline – Trip is still reliant on the US market for around half its revenues.

Growth rates in this core market are still strong – running at annual growth rates in excess of 30% – but Europe and especially Asia represent TripAdvisor’s most exciting growth prospects.

I would suggest Europe should be a slam dunk for rapid growth, but Asian markets may prove a tougher nut to crack, especially China where local internet behemoths are highly unlikely to let Trip get too big a foothold.

My sense is that TripAdvisor could soon see growth flag unless it begins to rethink its strategy.

A trade-off is rapidly beginning to emerge – Trip needs a vast quantity of reviews to generate direct revenues, but the more it pushes e-commerce into the heart of its offering the more it risks sullying its brand.

I, like many users, go to Trip because of those views and the ensuing rich variety of content. I don’t go to it because it’s the best aggregator or online travel agent.

If Trip pushes too aggressively on these revenue generators, it will put off customers who currently trust it. That means Trip has to find new add-ons and services which make us want to stay longer on its site.

It seems to be pioneering two propositions. The first is to provide an integrated travel app that can provide more than reviews.

Personalised content seems to be the Holy Grail and is behind Trip’s recent purchase of the excellent Rove service (founded in 2011).

Rove describes its app as an “automatic journal to remember your best memories” and gives users the option to add notes and “curate photos.”

Trip has acquired other app developers in the past, including photo app Tiny Post, with the apparent aim of making its app as essential as Facebook or Foursquare.

The other strategy seems to build on that personalisation idea to ensure the site has unique travel inventory focused on discerning, wealthier customers.

In simple language, that translates into tours and guided activities via TripAdvisor’s acquisition of Viator for $200 million.

My sense is this could be a huge market for Trip. Many of the upscale luxury-orientated travel operators in the US and UK make huge margins by effectively dynamic packaging local guide and operator services into customer-friendly product.

If those locals can sell a differentiated product through Viator and Trip, revenue pick-up could be huge.

I would also suggest that Trip will be investigating the rise of semantic search. An excellent article on US website Skift recently identified this as the big travel trend for 2015.

The idea here is that keyword-matched searches are old school. Smart travel-based search now needs to understand the wider context of a query and line up digital content to support this query in a personalised manner.

Lurking in the background are terms such as ‘natural queries’, ‘past behaviours’ and ‘multiple data points’.

Skift reports that, according to Carsten Kraus, chief executive of FACT-Finder: “OTAs which have implemented semantic search on their site have reported a 12% increase in sales conversions.

“Semantic search technology has grown to understand and respond to natural language. Travellers can phrase questions, like ‘Where can I go with a beach and nightlife scene that also has things for kids to do?’ and expect results that are relevant, in context and with intent. It has learned to adapt to misspellings, abbreviations, and slang terms.”

Obviously, TripAdvisor is far from being the only tech giant looking to build on semantic search. Google is already making huge inroads into this space.

And talking of Google, one can’t help but notice that it has recently launched a makeover of its City Experts service, now called Local Guides.

US website TechCrunch reports: “The idea is still to encourage local reviewers to sign on, but there are now four expert levels instead of one.

“As soon as you hit 50 reviews, you’ll also get a badge and be highlighted as a top reviewer on Google Maps for Android and iOS. Top reviewers can also participate in private Google+ communities and local meet ups . . . they can also check their review counts and ratings on Maps or Google+.

“Current city experts are enrolled automatically, and if you’re willing to ‘write high-quality reviews and be yourself’, you can sign up on the Local Guides site.”

It’s obvious that Google has Trip firmly in its sights. Google could try to roll out its own review-based offering, but my sense is we could see the search giant make a move on Trip in 2015 or 2016.

$10 billion or even $15 billion sounds like a huge amount to pay for a business, but it’s really nothing major for Google and could easily be funded by a single low-yield corporate bond issue.

The upside for Google, having Trip within its stable, would be huge and I would argue every OTA would be terrified at the prospect.

I’d also suggest that major UK travel brands such as Tui and Thomas Cook should tread carefully. In a straight battle with a Trip-Google combo I wouldn’t wager much money on Thomas Cook building up its own web offering.

Obviously, any tie up with Google would have to overcome what we can euphemistically call the ‘Liberty/Malone’ challenge.

The US tech and media giant Liberty, run by billionaire media magnate John Malone, is a major shareholder in Trip.

Malone is also a consummate deal maker and restructurer and in August Bloomberg reported he had run “a tax-free spinoff of Liberty Interactive’s controlling interest in TripAdvisor”.

According to the financial news service there are now two ways in which Trip could go: “TripAdvisor, to gain its independence, could choose to buy out shareholders of the $1.8-billion holding company, called Liberty TripAdvisor Holdings Inc. Or larger rivals Priceline Group Inc. or Expedia Inc. could buy the holding company to seize control.” Or there is Google . . .

In one sense this Bloomberg report is spot on. Both Priceline and Expedia would be desperate to keep Google out of the equation – and both have been hugely acquisitive in recent months.

Priceline has recently gobbled up Kayak and OpenTable while Expedia has swooped on Travelocity as well as Australia’s Holdings for about $650 million.

Whatever happens next with TripAdvisor will have a big impact on the whole travel sector, sparking a bout of consolidation and takeovers. Watch this space.

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