TripAdvisor Tumbles After Earnings Sink

Image: TripAdvisor.

The recovering U.S. economy has bolstered Americans' appetites for travel, and online travel specialist TripAdvisor has made a big push to capture a big chunk of the growth opportunities in the industry. Coming into Thursday afternoon's second-quarter financial report, TripAdvisor shareholders wanted to see impressive revenue growth, but they were somewhat worried about the company's ability to boost its profits.

TripAdvisor once again disappointed investors on the bottom line, and the impact of adverse currency movements held back sales-growth prospects, as well. Let's look more closely at TripAdvisor to see whether investors are overreacting to the news.

TripAdvisor trips itself upTripAdvisor's second-quarter results reveal a lot about the high expectations that investors have for the company. Total revenue climbed by 25%, to $405 million; but despite that fairly healthy growth rate, it fell short of the 28% growth that those following the stock had wanted to see. Similarly, GAAP net income fell about 15% from the year-ago quarter, to $58 million. Even after excluding certain items, adjusted earnings of $0.54 per share were down $0.01 from last year's quarter, and missed the consensus forecast for flat year-over-year results.

Currency impacts played a big role in keeping TripAdvisor down. The company said that, on a constant-currency basis, revenue climbed at a 35% rate. The impact on adjusted operating earnings was even more dramatic, costing TripAdvisor 20 percentage points of potential growth, and turning what would have been a 15% gain in adjusted earnings before income tax, depreciation, and amortization into a 5% loss in dollar terms.

Looking more closely at TripAdvisor's business segments, trends from previous quarters showed themselves again. Subscription and transaction-based revenue nearly doubled, to $99 million, making up nearly a quarter of the company's overall sales. Click-based advertising climbed 13%, and still represents the most important part of TripAdvisor's business, bringing in two-thirds of all sales. Display-based ads brought up the rear again, but still posted a solid 8% rise.

TripAdvisor did see its trend toward increasing international business reverse itself in the second quarter. North American revenue climbed 31%, making up more than half of TripAdvisor's overall sales, while Europe's gains were limited to 19%, and the Asia-Pacific region grew at just a 14% pace. Latin America surged 46%, but TripAdvisor gets only a tiny amount of its overall sales from the region.

Is TripAdvisor stock overreacting to the news? TripAdvisor still has plenty of confidence in its long-term prospects. CEO Steve Kaufer pointed to many corporate successes, including reaching the 250 million mark in reviews, and 30% growth in monthly unique users, to 375 million. He also noted that TripAdvisor "further deepened our relationships with large hotel partners to power direct bookings," which is a critical aspect of its future strategic plan.

Moreover, acquisitions in the restaurant and attractions business helped power growth outside its core hotel segment. Sales in TripAdvisor's Other segment tripled from year-ago levels, and now makes up nearly a sixth of the company's overall revenue.

Still, the big question for the immediate future remains whether TripAdvisor can ramp up its hotel business to stand up to its rivals. Margins from the hotel segment collapsed from 43% during the second quarter of 2014 to 36% last quarter, as costs have climbed at a much faster rate than revenue. Selling and marketing expenses have soared by more than half during the past year, and investors are getting impatient to see more substantial rewards from investments in the TripAdvisor brand.

TripAdvisor shareholders didn't seem to agree with the company's attempts to portray its results favorably, as the stock dropped nearly 9% in the first hour of after-market trading following the announcement. Skeptical investors can point to the company's high earnings multiple, and argue that if bottom-line growth comes to a standstill, then TripAdvisor doesn't deserve a premium valuation that shareholders have come to expect.

Going forward, TripAdvisor will have to convince its investors that its initiatives will pay off in the long run -- even if those gains don't come as soon as shareholders would like.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of TripAdvisor. 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.

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