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As an investment, TripAdvisor (NASDAQ: TRIP) has been in a funk for over two years now. The stock traded as high as $110 per share back in 2014, but it's been stuck between $60 and $70 for most of this year. While there are many contributing factors, one major reason is that the company is still in the midst of changing its business model -- from relying mostly on click-based advertising to making most of its money when users complete their hotel stays. The global rollout of TripAdvisor's Instant Booking platform took the company a full year, increasing expenses and creating lumpiness in revenue. But as all of that begins to fade in the rearview mirror, the company should be able to once again focus on what it's great at: helping travelers make the most of their trips. And given TripAdvisor's formidable strengths, that's exciting news for investors like me.
Here's a look at some of the reasons I own TripAdvisor stock.
It's No. 1 in an enormous (and growing) market
The biggest reason I'm invested in TripAdvisor is the most obvious. It's the top dog in a huge market.
Total worldwide travel spend for 2016 is estimated at $1.3 trillion, with $500 billion of that amount expected to be spent online. Travel bookings will only continue to move online over time, which spells massive opportunity for TripAdvisor, as well as other players such as Priceline Group (NASDAQ: PCLN) and Expedia (NASDAQ: EXPE). Last year, TripAdvisor recorded a mere $1.5 billion in revenue, which leaves an awful lot of upside and probably many years -- if not decades -- of strong growth ahead.
TripAdvisor is the world's largest travel site, according to comScore, with 350 million monthly unique users, and 385 million traveler reviews on more than 6.6 million businesses around the globe. And though it's still in the early days for Instant Booking, users can already directly book stays at more than half a million hotels. As more people look for a one-stop shopping experience for travel, TripAdvisor shines because of its sheer scale.
As the most popular online destination for travel, TripAdvisor will also continue to benefit from the "network effect" -- where its huge repository of content attracts more travelers who read reviews, book trips, and then post more reviews, which then attracts even more travelers -- you get the idea. In fact, more than 250 new pieces of content are posted every minute to TripAdvisor's sites, and more than 2,500 new topics are posted daily to TripAdvisor forums. In a world where content is king, TripAdvisor sits atop the throne.
Instant Booking is going to be big
By allowing users to compare rooms and rates, and then book reservations all in one seamless experience, TripAdvisor is poised to benefit big time. People who used to plan their trips on TripAdvisor's site but then had to leave to make their reservation elsewhere now have a much more convenient option. And so far, things look promising. In the second quarter of 2016, U.S. desktop instant booking rates grew 20% year over year. The company's data also shows that U.S. Instant Booking customers demonstrate higher monetization rates and repeat rates. Keep in mind that Instant Booking wasn't available in most of the world until 2016, but based on these early metrics, it appears that the company's new platform was a smart bet.
Now that Instant Booking is live, the company is moving to test-and-learn mode as it seeks to improve the platform. TripAdvisor has already announced plans to help hotel partners increase booking rates by featuring better photo content. And it's looking to localize the booking experience around the world, making country-specific tweaks that increase conversion rates. Perhaps most importantly, the company is now running targeted promotions -- funded by dollars that used to go to TV advertising -- to provide incentive for bookings and increase consumer awareness of Instant Booking capabilities.
Hotels were just the beginning
TripAdvisor's hotel segment currently generates the lion's share of its revenue -- 81% in the second quarter. But the company's attractions segment could become just as important to its success over the long run.
TripAdvisor recently added "Things to Do" to its primary search options in September, opening up another giant growth opportunity. Travelers can now quickly browse nearly 700,000 local attractions and conveniently purchase everything from museum tickets to helicopter rides.
The total market for attractions in the U.S. and U.K. is estimated to be $80 billion. And TripAdvisor thinks this segment is capable of eventually generating $1 billion in revenue. So the company is building out attractions listings as quickly as possible, growing its offerings by 63% during the first half of 2016. And so far, so good. For the same period, attractions bookings are up 150% year over year.
It's making smart investments in apps
The road to becoming the booking site of choice starts with becoming the app of choice. On TripAdvisor's second-quarter earnings call, CEO Steve Kaufer stated bluntly, "We believe it will be an app world."
The company's bullishness on apps is good for investors, since app users are more likely to save their credit card information, which creates a faster transaction, creating more loyal users who generate repeat business. Not surprisingly, TripAdvisor's app users book at four to five times the overall rate of website users. And although revenue generated through apps is currently a relatively small piece of the pie, it's growing quickly. In the second quarter, click-based and transaction revenue on the company's apps grew by 50%, while the number of app-based hotel shoppers also grew by 50%.
Like TripAdvisor's management, I'm taking the long view
With the introduction of Instant Booking, a fast-growing attractions segment, and a commitment to an app-first experience, TripAdvisor's management team has demonstrated that it's willing to make strategic investments that may cause some short-term hiccups for the sake of long-term growth. And, speaking as a shareholder, I find that reassuring, because I'm much more interested in what TripAdvisor will look like five years from now than what it will look like next quarter.
And while the stock has recently slumped, the company has been managing its way through this rough period fairly well. Even during a challenging first half of 2016, which saw some ugly declines in revenue and earnings per share, TripAdvisor was still able to generate $331 million in free cash flow year to date, and it ended the second quarter with a $891 million cash position. With TripAdvisor's sites and apps continuing to be the most sought-after destinations for online travel, if the company can return to overall revenue growth in the near future, I believe investors will be well rewarded for this journey.
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Andy Gould owns shares of PCLN and TRIP. Andy Gould has the following options: short March 2017 $55 puts on TRIP. The Motley Fool owns shares of and recommends PCLN and TRIP. 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.