Turbulence at TripAdvisor: Travel Review Site Is Losing Altitude Fast

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TripAdvisor
It seemed like a great idea at the time. Leading travel portal Expedia (EXPE) spun off TripAdvisor (TRIP) -- the longtime hub of online travel reviews -- this past December.

Expedia would be able to focus on its strengths as a global booker of travel, and investors would be able to latch on to the faster-growing yet smaller TripAdvisor as a standalone play on the Web 2.0 revolution, where user-generated content and engagement dictate success.

TripAdvisor has been around since before the dot-com bubble popped. The site was launched in 2000, at a time when Internet victories were weighed more by eyeballs than actual monetization. Travelers needed a place to rant or rave about hotels or local eateries they frequented, and TripAdvisor thrived as the go-to destination.

In the current era, when Yelp (YELP), Twitter, and Facebook (FB) feast on user-generated content, investors ate up the TripAdvisor offering. By the time the shares peaked last week at $47.81, the stock had soared nearly 90% higher year to date.

Then came Tuesday night's earnings report -- and the captain turned on the "Fasten your seatbelts" light.

Turbulence Ahead

TripAdvisor closed out its second quarter with disappointing results. Revenue climbed 16% to $197.1 million, well short of the $202.8 million that analysts were targeting.

That's disappointing, of course, but it could be worse. Earnings, adjusted earnings, cash flow, free cash flow, and adjusted EBITDA all grew even slower than TripAdvisor's 16% year-over-year advance on the top line. In other words, margins aren't exactly cooperating even though it was TripAdvisor's revenue miss that led to the share sell-off after the report.

A closer look reveals a problematic trend closer to home. International growth actually helped pad TripAdvisor's success during the period. Domestic revenue actually climbed roughly 7% higher during the quarter, and investors may want to see what's at the root of its decelerating stateside growth.

Could it be that info-seeking travelers in this country have turned to new resources? TripAdvisor may brag about the 56 million unique visitors that it attracted during the month of May, but Facebook generates 10 times as many unique visitors in a single day as TripAdvisor attracts in an entire month.

Yes, TripAdvisor has amassed 75 million reviews and opinions over the years, but are they reliable? Wouldn't you rather ask your friends and family on Facebook where the best place to stay in Seattle or eat in Tuscany is than sort through countless reviews by possibly biased strangers?

Gaming the System

The problem with most review sites is that they're easy to game. A hotel operator can bash rivals under different aliases and praise his own properties.

If you don't think that there's an ethical disconnect, conduct a little experiment by actually going to TripAdvisor.com. Punch in your hometown and a few cities that you know fairly well. Are the top-rated hotels really the best lodging establishments?

Let's take Miami for a test drive. I know the city well. I was Citysearch Editor for Miami from 2002 through 2010. The highest rated hotel is a Hampton Inn. It's a reasonable hotel. The chain is solid nationwide. But I can still assure you that there are more than a dozen better and more memorable hotels in town.

Then we get to specialties outside of lodging.

Eat up

TripAdvisor used to be the go-to place for restaurant reviews, but that was before Yelp arrived on the scene. Between Yelp's reviews and OpenTable's (OPEN) online reservations platform, there really isn't much of a need to hit up TripAdvisor for dining recommendations.

Even though TripAdvisor has been around far longer than Yelp, most restaurants have more reviews on Yelp than TripAdvisor. Even TripAdvisor's top-rated restaurant in Miami has twice as many reviews on Yelp.

Unlike TripAdvisor, Yelp is trendy and isn't hampered by archaic design. Yelp also encourages participation by rewarding active users of the site with special events.

We also can't ignore Angie's List (ANGI). It raises the bar for user reviews by applying a cover charge. It may seem silly to pay a premium to read and share opinions on local services and providers, but the difference is that vetted reviews are harder to game.

TripAdvisor had its time in the sun, but the prospects of decelerating growth and the rise of the next generation of user-review sites point to more weakness in the future.

The stock closed on Tuesday at a steep 29 times this year's earnings -- and a still hairy 24 times next year's projected profitability. There are cheaper and better travel plays out there.
Pack your bags. See the world. You'll find them.

Motley Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Facebook, Opentable, and TripAdvisor. Motley Fool newsletter services have recommended buying shares of TripAdvisor and Opentable.

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