Taking a step back, we look at underlying themes in the category: 1) Hotel metasearch is a big and growing slice of online travel agency (OTA) ad spend; 2) With OTA ad budgets growing and hotel metasearch gaining share, the category enjoys a healthy growth profile; 3) Within the category, Trivago (ticker: TRVG) [rated at Buy] has surpassed TripAdvisor (TRIP) [rated at Neutral] and the question is how much margin might TripAdvisor be willing to sacrifice to stem the loss of OTA ad budget share.
Expedia (EXPE) and Priceline Group (PCLN) spent $5.8 billion on advertising last year, with $1.3 billion of that (23%) deployed on TripAdvisor and Trivago. Spend by those two OTAs accounted for 85% of the hotel metasearch revenue of TripAdvisor and Trivago (excluding ancillary revenue for both). Hotel metasearch is an important ad channel for the marquee OTAs, and their spend is the main driver of revenue for the hotel metasearch platforms.
Based on our estimates, the combined ad spend of Expedia and Priceline should grow about 16% in 2017, and we see hotel metasearch wallet share rising by about 160 basis points. Why do we have share up? While the channel offers a relatively low return on investment (ROI) to the OTA, it is a key source of high intent traffic to drive the approximate 20% room-night growth targeted by both. That gets us to growth in hotel metasearch revenue of 25%-30% for the year versus OTA revenue growth of 15%-17%. The hotel metasearch channel is growing faster because OTA margins are compressing.
While TripAdvisor is bigger than Trivago in total revenue ($1.480 billion versus $837 million in 2016), Trivago is bigger in the core hotel metasearch business ($827 million versus $750 million in 2016). Trivago reached parity with TripAdvisor in second-quarter 2016 with each at about 11% of OTA budget, but Trivago share swelled to about 15% in first-quarter 2017 versus TripAdvisor at about 11%. Why is Trivago winning OTA ad budget share? Trivago is growing hotel shoppers faster than TripAdvisor, and TripAdvisor is growing shoppers slower than the pace of room night growth that the OTAs are trying to sustain.
In what appears to be a bid to address the issue, TripAdvisor is rolling out a site redesign focused more on hotel price discovery (appeals to the later-stage traveler with a higher intent to purchase) and backing that with a $70 million-$80 million TV campaign in 2017. That is still small versus the more than $400 million we estimate Trivago will spend this year. The question is how much margin will TripAdvisor be willing to sacrifice in 2018 to stem the loss of OTA ad budget share. We estimate Trivago will spend more than $500 million next year. If we assume that TripAdvisor spends about $500 million at an return on ad spend (ROAS) of about 90%, that would put earnings before interest, taxes, depreciation and amortization (Ebitda) at less than $300 million and margin at about 13%.
View source barrons.com
— Jake Fuller