Return on (re)Invested Capital | TripAdvisor Case Study

TripAdvisor will announce its 2019 fourth quarter and full-year results in a couple of days. 

The company began its life as a publicly-traded company on December 21, 2011, when it was spun-off from its parent Expedia (which itself had been spun-off Barry Diller’s IAC in 2005). Under the ticker symbol TRIP, TripAdvisor shares opened trading at $30, with a market capitalization of $3.7 billion. 

If you would have received shares of TRIP at the spin-off and held them until today, as of today, your shares would be worth $29.81. In addition to that, you would have received a special dividend at the end of 2019 of $3.50 per share. 

The compound annual growth rate of your investment would have been somewhere around 1.31% per year during the roughly 8 year period. You would have done better buying a government bond.

Reinvesting Capital

At the time when the company was being spun-off, TripAdvisor was a powerhouse in online travel with over 50 million user reviews. The company was both profitable and growing fast. In the 2011 annual report, the company showed revenues of $617 million, 31.4% higher than the year before. 

TripAdvisor was also very profitable with an operating margin of almost 29%. A net income of $178 million earned its shareholders $1.32 per share.

Over the last four quarters ending with the 3rd quarter of 2019, the company has generated a net income of $117 million. The combined earnings per share over the same period was $0.83.

What happened? Was TripAdvisor unprofitable? Did the company not manage to grow its revenues? Actually, neither. 

Since the spin-off, TripAdvisor has steadily increased its revenues to about $1.6 billion in 2018. TripAdvisor has also remained profitable. The company has recorded a profit, every single quarter since becoming a publicly-traded company, aside from the fourth quarter of 2017. 

TripAdvisor Earnings Per Share History

YearEPS
2011$1.32
2012$1.37
2013$1.41
2014$1.55
2015$1.36
2016$0.82
2017-$0.14
2018$0.81
1Q2019$0.18
2Q2019$0.24
3Q2019$0.36
Accumulated$9.28

Here is the simple math: 

  • Had you bought TRIP just after the spin-off and held until today, you accumulated net income per share would be $9.28
  • The company took all those earnings and reinvested them into the business, until 2019 when they paid you $3.50
  • The redeployment of your capital over 8 years, resulted in earnings per shares decreasing by 37% before factoring in inflation.  

Capital Allocation

Software companies and eCommerce companies are often thought to have scalable business models. Larger scale, more efficiencies, bigger profits. In the case of TripAdvisor, the opposite seems to be the case.

The company went from $617 million in revenues and a 29% net profit to generating less than 8% net profit on close to $1.6 billion in revenues over the last 4 quarters. Essentially, it seems that the TripAdvisor management has redeployed earnings into projects that have grown the business but at a cost to shareholders. 

In the 2011 annual report, TripAdvisor expensed just over $17 million due to stock-based compensation, or about 14.5% of the size of the net income. In the 2018 report, expense due to stock-based compensation had reached $118 million or an amount $5 million higher than the total net profit attributable to shareholders of TripAdvisor. 

Potential Special Situation

Despite competitive pressure from Google, there is no denying that TripAdvisor itself is a pretty unique asset. But as TripAdvisor’s history shows, value creation doesn’t necessarily equate to value capture.  

The underperformance at TripAdvisor calls for action. A recent article on Skift focused on the relationship between TripAdvisor CEO Stephen Kaufer and its chairman Greg Maffei, who controls majority voting rights through Liberty TripAdvisor Holdings.

I previously wrote about a similar situation at Expedia which ended with Expedia acquiring Liberty Expedia Holdings. It should not come at a great surprise if Liberty TripAdvisor would also cease to exist in the not too distant future. 

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