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Needham & Company Starts TripAdvisor (TRIP) at Buy, Sees EPS Upside

October 4, 2012 9:28 AM EDT Send to a Friend
Get Alerts TRIP Hot Sheet
Price: $99.44 +0.35%

Rating Summary:
    11 Buy, 18 Hold, 2 Sell

Rating Trend: Down Down

Today's Overall Ratings:
    Up: 24 | Down: 14 | New: 52
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Needham & Company initiates coverage on TripAdvisor (NASDAQ: TRIP) with a Buy. PT $38.00.

The firm cited:
1. EPS Upside. We believe there are several areas of EPS upside for TripAdvisor (TRIP) in 2013 and beyond, including easier comps beginning in 4Q12, a strengthening global economy, and revenue upside from international, business services, and new bidding initiatives. We estimate that TRIP will report Operating EPS of $1.90 in 2013, above consensus estimates.

2. Strategic Position. TRIP benefits from several secular shifts occurring in the Internet today including consumer demand for information everywhere, the wisdom of crowds transitioning to the wisdom of friends, the economic power of dominant brands, the power of intimacy at scale (i.e., personalization), and the growing importance of impartial reviews and recommendations.

3. Purchase Funnel. TRIP is expanding its position within the purchase funnel, which should drive incremental value. Historically, TRIP’s focus on user reviews has put it squarely in the “consideration” section of the purchase funnel. TRIP is moving up the purchase funnel toward “awareness” through its Facebook relationship and Wanderfly acquisition and moving down the purchase funnel toward “purchase” through FlipKey and Holiday Lettings. Over time, top-of-funnel initiatives should lower TRIP’s customer acquisition costs while bottom-of-funnel initiatives should raise the average value of a customer.

4. Valuation. We calculate several forms of valuation for TRIP. Our favorite is a “break-even” DCF which uses TRIP’s current share price to impute the market’s growth expectations: TRIP must achieve a 10-year EBITDA CAGR of 4.4% to justify its current share price. This seems low in light of our 25% EBITDA growth estimate for FY13 alone. Compared to its internet media peers, TRIP trades at one of the lowest 2013E P/Es (17x compared to most others at 21-55x) and EBITDA multiples (11x vs a mean of 14x) despite having one of the highest EBITDA growth rates in 2013E.

5. Target Price. Our target price of $38 is based on a 10-year DCF model, using a WACC of 10.4% and a long-term nominal GDP growth rate of 1%. Our $38 target price implies a 10-year EBITDA growth rate of 6.8% annually, beginning in 2013.

For an analyst ratings summary and ratings history on TripAdvisor click here. For more ratings news on TripAdvisor click here.

Shares of TripAdvisor closed at $32.12 yesterday.




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