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Why TripAdvisor’s Margin May Fall in 2017

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TripAdvisor’s 2Q17 performance

TripAdvisor’s (TRIP) 2Q17 adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) rose from $73.0 million in 2Q16 to $101.0 million in 2Q17, a 6.0% rise YoY (year-over-year). EBITDA margins were flat at 24.0% for the quarter.

EBITDA for the hotel segment fell 20.0% YoY to $84.0 million due to its EBITDA margin falling from 33.0% to 26.0% in 2Q17. EBITDA for the non-hotel segment rose 270.0% YoY to $17.0 million due to its EBITDA margin rising to 17.0% compared to -13.0% in 2Q16.

The net income for 2Q17 fell 5.0% YoY to $27.0 million. However, due to a lower number of shares, EPS (earnings per share) rose to $0.38.

Costs continue to rise

TripAdvisor continues to spend heavily on advertising to improve its brand recall in consumers’ minds. It’s also trying to change its image from an information website to a complete online travel agent.

Since TripAdvisor continues to invest heavily in its business, total expenses for the first half of 2017 rose 10.6% YoY to $723.0 million. It was driven mainly by selling and marketing costs that rose almost 16.6% to $436.0 million.

Outlook

TripAdvisor’s focus in 2017 is revenue growth. Management expects to see high single-digit revenue growth in 2017. And for that, it will be increasing its advertisement spending, including costs for TV ads. The high marketing costs are thus going to go higher. In fact, the bulk of the expected $70.0 million–$80.0 million advertising spending will happen in 3Q17.

Lower monetization rates and increasing competition are expected to weigh heavily on the company’s margins. TripAdvisor has guided for 2017 EBITDA to be flat or fall YoY.

Investors can gain exposure to online travel stocks by investing in the SPDR S&P Retail ETF (XRT), which holds 1.2% in Priceline (PCLN), 1.2% in TripAdvisor, and 1.1% in Expedia (EXPE). It has no holdings in Ctrip.com International (CTRP).

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