TripAdvisor's Most Attractive Business Isn't Hotels

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There isn't much about TripAdvisor's (NASDAQ: TRIP) non-hotel business segment that would grab investors' attention at first glance. After all, the division contributed just $2 million toward profits over the last six months, or 5% of the total haul. It has been a money drain in each of the last three years, and removed $28 million from adjusted earnings in 2016 alone.

That helps explain why Wall Street focused on the weakening outlook for the core hotel business when it punished the stock following the second-quarter earnings report in early August. Yet TripAdvisor's non-hotel segment is becoming a key part of the operations and, if you believe management, it should deliver attractive sales and profit gains over the long term.

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Big business

In 2014, TripAdvisor counted just 9% of its revenue as coming from this segment that allows users to book attractions, restaurants, and vacation rentals, which it lumps together in a unit called "non-hotel". The remaining 91% of sales came from its core platform of hotel inventory.

The division jumped to 15% of sales in 2015 and reached 20% of the business last year thanks to a 27% revenue spike. That strong momentum has held up so far in 2017. Sales are up 26% over the last six months, and the division accounted for 20% of the total operations through the first half of the year.

News was even better on the bottom line. The non-hotel unit generated $17 million of profit last quarter, compared to a $15 million loss in the prior period and a $10 million loss in the year-ago period. The improvement allowed TripAdvisor to post an overall uptick in adjusted profit margin, from 20% to 24%, even while the core hotel business stumbled.

Why management is excited

Executives think they're just scratching the surface on these non-hotel booking options. In fact, management is bullish about the long-run prospects, particularly for the attractions segment. "The [total addressable market] is phenomenally large," CEO Stephen Kaufer said in the company's second-quarter conference call while citing TripAdvisor's success in building up its inventory of bookable experiences. "As you grow in scale and as more people get used to booking online," he continued, "you're looking at a business that basically has almost all tailwinds to it."

The company is still years away from switching its focus toward maximizing profits. Still, its improving earning power is already making a solid contribution to earnings. Growth in the non-hotel segment allowed TripAdvisor to keep its 2017 profit forecast in place even as executives lowered their sales growth outlook for the much larger hotel division.

Plan for success

TripAdvisor's priority today is to keep adding attraction and restaurant inventory so that users have plenty of booking choices when they plan their vacations. With a sufficient base, the focus then turns to converting a higher percentage of browsing users into paying customers while driving traffic across all of its sites through increased marketing spending.

The division's healthy profitability last quarter -- 17% compared to the hotel segment's 26% -- implies that those tweaks could result in a business that has at least as much earning power as the hotel segment. Considering it's only been a few years since the hotel unit accounted for essentially all of TripAdvisor's revenue, it shouldn't be long before this new business line starts making a real impact on broad growth trends for the company.

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Demitrios Kalogeropoulos owns shares of TripAdvisor. The Motley Fool owns shares of and recommends TripAdvisor. The Motley Fool has a disclosure policy.