TripAdvisor Inc Takes Investors on a Rough Ride

By Markets Fool.com

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Image source: The Motley Fool.

TripAdvisor(NASDAQ: TRIP) has been a big winner in the travel sector over the years, riding a trend that has also lifted its peersExpediaandPriceline.

TripAdvisor, which has focused on travel reviews and makes money selling ads against the content, is in the midst of transition as it rolls out a booking service to complete directly against online travel agents and adapts to the mobile space. However, those growing pains showed in its latest report, as thestock tumbled following the release.

Shares are down over 8% as of mid-day trading as the company posted a 3% decline in revenue and a sharper drop in profits as you can see in the chart below:

Category Q2 2016 Q2 2015 Growth (YOY)
Sales $391 million $405 million (3.5%)
Operating income $48 million $79 million (39.2%)
Earnings per share $0.23 $0.40 (42.5%)

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Data source: TripAdvisor earnings report.

Click-based ad revenue was the key culprit here as sales in that category, which makes up more than half of total revenue, fell 15% to $201 million. Profits also got squeezed, as the company lifted its spending on technology and marketing. Technology and content expenses jumped 24% to $62 million, while marketing expenses increased 5% to $202 million. The company is spending more on marketing and tech capabilities as it expands into areas such as direct hotel bookings, mobile, and airline reviews, which it launched last month.

TripAdvisor CEO Steve Kaufer sounded optimistic when discussing the quarter, saying, "We took important steps along our key initiatives during the second quarter." He also emphasized that the company is building for the long-term.

The company continues to focus on adding supply to its Instant Booking platform and now has more than 500,000 hotels listed -- TripAdvisor launched the new platform globally during the quarter.

Will revenue bounce back?

Management is focused on diversifying away from hotels into airlines, restaurants, activities, and other parts of the travel experience. TripAdvisor has been experiencing headwinds from competition in the travel industry, as Airbnb has made waves in hospitality. It is also seeing revenue per user slide as it transitions to mobile, which can provide challenges for advertising due to the smaller screen and lower monetization rate.

The company noted challenges from terrorist attacks and other such events outside its control and said that soft trends have continued into July.

Ultimately, TripAdvisor's success will be determined by its ability to navigate the transition to a mobile-first company, build out its Instant Booking platform, and diversify into non-hotel revenue. With millions of reviews, TripAdvisor has a unique asset in this space and leveraging it through bookings makes sense.

The management team has proved its savvy in the past, avoiding the pitfalls of other review-based websites such asYelp orAngie's List, but tangling in bookings with Priceline, Expedia, and now Airbnb could be its toughest challenge yet.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Priceline Group and TripAdvisor. The Motley Fool recommends Yelp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.