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Why TripAdvisor’s Margins Could Decline in 2017

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TripAdvisor’s 4Q16 performance

TripAdvisor’s (TRIP) adjusted EBITDA[1. earnings before interest, tax, depreciation, and amortization] decreased from $466 million in 2015 to $352 million in 2016, a decline of 24% year-over-year (or YoY). Its EBITDA margins also fell to 24% compared to 31% in 2016.

The EBITDA of TRIP’s Hotel segment fell 19% to $380 million compared to $472 million in 2015. The Hotel segment’s EBITDA margins also fell to 32% compared to 37% in 2015.

The Non-Hotel segment EBITDA fell 367% YoY to -$28 million, with an EBITDA margin of -10% compared to its -3% margin in 2015.

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Costs continue to increase

Tracking changes in consumer behavior is a challenging task and in our view, TripAdvisor needs to do that to return to its growth trajectory. From cultivating a booking culture among customers to ensuring repeat business, everything could incur costs for TripAdvisor.

As TripAdvisor continues to invest heavily in its business, 2016 selling and marketing expenses increased 9.2% to $765 million. Technology and content costs also rose almost 17.4% to $243 million.

Outlook

Why Is TripAdvisor Having a Tough Time with Earnings Growth? noted that TripAdvisor’s focus in 2017 should be revenue growth. To accomplish that goal, TRIP would increase its advertising spending, including on TV ads. The company’s high marketing costs are expected to climb.

Add the increased advertising spending to its decreased monetization rates, and we have a double whammy for its margins. TripAdvisor has guided for its 2017 EBITDA to be flat or down YoY.

TripAdvisor forms 2% of the holdings of the First Trust Dow Jones Internet Index ETF (FDN), which also invests 2.6% of its holdings in Expedia (EXPE), but not in Priceline (PCLN) or Ctrip (CTRP).

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