Underestimated Companies: Will TripAdvisor Shares Grow?
The beginning of 2021 was pretty positive for stock market investors. In January and February, it was extremely difficult to find stocks that wouldn’t eventually go up in price. For example, stock prices of cannabis companies skyrocketed by hundreds of percent and that’s just one bright illustration to support my idea.
Being euphoric from the profit they received, speculators rushed off to search for new “buying” ideas. At that moment, Warren Buffett came to the rescue – his fund started investing in the banking sector and, as a result, shares of the sector representatives went up. The upshot was that the profit-making period lasted until the summer.
However, any growth is always followed by another decline. Shares of cannabis companies plunged and the growth of the banking sector slowed down despite quite positive financial reports for the second quarter.
So, what to do now and where to find a hint at which stocks to invest in at this point?
Unfortunately, or, vice versa, fortunately for some, now is the time when they have to decide on their own – look for new investment ideas, analyse companies, and search for stocks with low costs and high growth potential. One of such companies is TripAdvisor, Inc. (NASDAQ: TRIP) with its shares losing 45% over the last 4 months.
TripAdvisor was founded in 2000. The company runs several websites that help to book hotels or other accommodation, transport, or make reservations in a restaurant almost anywhere in the world, as well as leave feedback about your trip.
In the early days, TripAdvisor had only one website but as time was going by, the company expanded and bought other platforms, which provide similar services to people fond of travelling. As a result, today the company runs 19 websites around the world, while tripadvisor.com has localized versions in 48 markets and 28 languages, visited by 462 million users every month.
Expenditure cut at TripAdvisor
Since the company operates in the tourism sector, the coronavirus pandemic had a very negative influence on its business. Its annual income dropped from $1.5 billion to $600 million and TripAdvisor had to cut its expenditures and expenses. As a result, the company fired 25% of staff, closed a lot of offices, and distance work for its employees.
TripAdvisor management recommended their staff around the world to work 4 days a week with a 20% pay cut, while the company’s general director opted out of his salary until the end of 2020.
TripAdvisor’s debt load also increased during the pandemic. However, the company was lucky to have enough assets and free cash on its balance sheet, so none of the investors were thinking about default.
TripAdvisor canvasses public opinion
Right now, the situation is changing for the better. The global vaccination campaign leads to a higher demand for tourism services.
To understand the mood on the market, TripAdvisor held a questionnaire survey among its American clients, which showed that 52% vaccinated users were going to travel around the country, 22% wanted to go abroad, while the rest didn’t plan to go anywhere at all. The survey also said that vaccinated people felt more confident and planned longer vacations.
Reports from airline companies also say that the tourist traffic is recovering as the demand for passenger air travel is increasing. The aircraft manufacturer, the Boeing Company (NYSE: BA), makes a point that passenger jet orders went up.
The sector is recovering very quickly and that causes some problems. For example, after cutting their workforce, airline companies are now facing personnel shortages.
TripAdvisor is likely to share the same destiny. However, this issue will probably be temporary and may flatten out the income growth curve by prolonging it for a longer period of time, thus increasing the amount of positive news about the revenue growth in the future.
TripAdvisor introduces an annual subscription
During the pandemic, TripAdvisor decided to revise its business model a little bit, taking a hint from streaming services, which significantly increased the number of their subscribers in 2020. The users often chose a subscription for a specific period instead of pay per view model.
TripAdvisor also decided to introduce an annual subscription priced at $99, which provides clients with discounts on hotels or free services during their stays, as well as on flights and car rentals.
Hertz Five Star with a subscription from TripAdvisor
For example, clients who sign up for the service will also receive a year of Hertz Five Star elite status. Hertz itself grants this status to those who spend at least $2,400 a year on car rental. The key advantage of Hertz Five Star is points, which are given for every dollar a client spends. The elite status gives 1.25 points, a 25% increase. Points can be used for paying rent in the future.
TripAdvisor’s transition to a subscription model is good for hotels as well. Earlier, they had to pay aggregators a commission for each registration. Thanks to the subscription model, hotels are no longer charged with this commission, however, they are obliged to offer discounts for their services, for example, free SPA procedures, booking discounts, etc.
What is so interesting about the subscription model for stock market investors?
From the point of view of a driver for the stock growth and development, the company made the right decision. After all, the only thing that matters is a growing number of subscribers. I’ll explain why it really matters using the example of the famous social network Facebook.
After the IPO, market players required a new driver for the stock growth. Facebook doesn’t pay dividends, that’s why simply buying its shares and living off them won’t work. In this case, it was necessary for the company to have a constantly improving aspect, that might influence its revenue.
This aspect was the number of newly registered users. The number was increasing, so was the company’s revenue and the price of its shares. However, when it surpassed 2 billion, it became clear that the limit was pretty close because not everybody on this planet has internet access or a Facebook account.
The bottom line is that clouds above the company were “growing heavier” and at some point, the management decided to stop publishing the data on the number of newly registered users. Instead, they started releasing monthly reports on the number of active users – it was a new driver for growth and this news pushed the company’s shares upwards.
TripAdvisor can boast a monthly number of their website visitors, which has already passed 462 million, and business accounts, which has reached 8.6 million. In the future, these numbers may continue growing, although not as fast as before, but it is not the case for the number of subscribers.
So far, the company’s subscription is available only to US citizens and this number is growing pretty slowly. However, the media will actively play up this “growing-number-of-subscribers” topic after each quarterly report. If it is 1,000 subscribers now and 10,000 subscribers in 3 months, then the news will shout about a 900% growth. An impressive reading.
One shouldn’t think that the subscription model was introduced solely for the purpose of raising the share price. This area helps the company to anticipate incomes and be more confident in applying money towards the expansion of its operations and makes it easier for investors and experts to forecast the company’s revenues and profits in the future.
Experts raise the target price up to $62
On receipt of the news about TripAdvisor’s new business model, experts immediately revised the company’s rating from “Neutral” to “Buy” with the target price of $62 per share. At the moment, shares cost $35, which implies a 75% growth potential.
Nothing has changed for the worse since the moment the subscription model was launched – an upsurge in tourists’ interest in travelling continues. Market players will learn the first data on the model efficiency on August 5th, when the company will publish its quarterly report. Strong numbers may increase the demand for TripAdvisor shares, prevent them from falling, and become a catalyst for further growth.
The stock market is about to correct pretty soon due to the slump in stock indices. When will the correction be over? No one knows. However, many investors try to benefit from this situation and buy stocks less pricey.
TripAdvisor shares are falling together with the market. From the fundamental point of view, the company is doing good, that’s why the current levels can be considered as underestimated. However, there is no need to hurry. It’s better to wait for the first green candlesticks to appear on the chart with increased volumes – this will be a signal that the correction is over and TripAdvisor shares may resume rising.
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