A Truly Lynchian Investment Opportunity
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Simplicity is the ultimate sophisticationOn an anecdotal basis, we've been noticing that more and more of our friends and family have been using TripAdvisor. And recent numbers appear to back up our casual observations. The company averaged 54 million monthly unique visitors in the second quarter of 2012, up 23% since the beginning of 2012.
The simplicity of TripAdvisor's business model is very compelling. Travelers share their experiences about vacation destinations, and TripAdvisor hosts their articles and aggregates all of their ratings. Prospective vacationers come to the site to read the reviews before planning their trips. Finally, TripAdvisor sells advertising space to online travel agencies, as readers tend to be highly qualified leads who are about to embark on a trip.
More and more people are going to TripAdvisor for their travel information, and that's a very attractive position to be in right now. IDC, a leading provider of market data, expects advertisers to spend $6 billion on online travel advertising this year alone. TripAdvisor is strengthening its business in order to capture more and more of this expanding market.
1 + 1 > 2By bringing together increasing numbers of reviewers, vacationers, and online travel agents, TripAdvisor is able to benefit from the network effect. In order to grow its network even further, the company has linked up its platform with Facebook (Nasdaq: FB ) . This should result in considerable long-term benefits.
Recommendations -- either from a friend or a trusted online post -- have a significant influence on people's purchasing decisions. That's why partnering with Facebook is so beneficial to TripAdvisor. It brings vacationers' friends into the decision-making process. According to management, TripAdvisor users with Facebook friends are more engaged, write more reviews, and generate more revenue. We suspect this partnership will continue to pay dividends over the long haul.
A good man at the helmThe Facebook partnership is just one example of the foresight demonstrated on numerous occasions by TripAdvisor CEO Stephen Kaufer, who co-founded the company after taking his wife on vacation to Playa del Carmen in 1998. Kaufer eventually sold TripAdvisor to IAC/InterActiveCorp in 2004. It remained a part of its Local and Media Services segment until InterActiveCorp spun out its travel-related assets in the form of Expedia (Nasdaq: EXPE ) in 2005. TripAdvisor matured nicely within Expedia. But now the company is back on its own today, as Expedia spun off TripAdvisor in December 2011.
Kaufer has remained with the company since its inception and has been the driving force behind its culture. He focuses on constant iteration of its products in order to keep them moving forward. With so many competitors nipping at its heels, TripAdvisor cannot become complacent, especially with so many opportunities to pursue.
The world is its oysterIt's an exciting time for TripAdvisor. Not only is the company back in control of its destiny following the spinoff, it has lots of ways to grow its business. Its core market, for example, continues to expand rapidly as more and more firms move dollars from traditional travel advertising to online. TripAdvisor remains focused on its core business while also pushing its mobile and international offerings.
Mobile advertising is a conundrum right now. The "eyeballs" are migrating to the mobile devices (smartphones and tablets), but the advertising dollars aren't following just yet. TripAdvisor continues to make real progress with its mobile initiative. Its application has been downloaded more than 22 million times, generating more than 27 million monthly unique visitors. Right now, TripAdvisor is promoting engagement on mobile devices in order to learn how people use the application. But it sees ample opportunity to generate revenue through actions such as contacting a hotel, making a restaurant reservation, or booking an attraction.
TripAdvisor's websites are now available in 30 countries and in 21 different languages. That's the way it has to be. Travel is truly a global industry and 75% of TripAdvisor's traffic now comes from an international IP address. Management still sees China as a huge opportunity -- its online market is growing at about 30% per year right now -- and has created dedicated Chinese websites there. Tripadvisor recently added Ctrip as a partner in the region to help it take advantage of this large and growing market.
RisksBig markets can make for big opportunities, but they also attract plenty of competition. For better or worse, TripAdvisor has plenty of both. Google (Nasdaq: GOOG ) , the largest online advertiser, has been buying travel-related content producers such as Zagat and Frommer's. Google could become an even bigger threat if it offers richer content to searchers, which could attract more leads for its advertisers.
But that's not all. Online travel agencies such as Expedia and priceline.com (Nasdaq: PCLN ) have seen the power of the travel review, and are encouraging their users to share their experiences. If they can gain more traction there, that could hurt TripAdvisor considerably.
TripAdvisor has benefited in the past from the power of the network effect to attract users and grow its business. If users decide to leave, either by losing trust in TripAdvisor or by switching to a disruptive technology, its business would be harmed, forcing us to sell our shares.
Bon voyageWe consider TripAdvisor to be a first-class company trading at a coach-class price. It continues to invest in its business, and we expect it to earn high rates of return in the future, which will power its earnings and cash flow growth. All in all, we see a multibagger in the making, and will be buying shares for our 10-Bagger portfolio.
Like TripAdvisor, Facebook benefits considerably from the network effect. The problem, of course, is that it appears to be having trouble growing its business fast enough to justify its current valuation. For the latest research on Facebook, be sure to sign up for our premium report on the company. You can get your premium research right now by clicking here.
5 Recession Resistant Stocks
Pam is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
So, what should you do? Liquidate all your stocks? No way! During the Great Recession, not every stock went down. The S&P 500 itself actually rose 3.5%. Some stocks did much, much better than that. I will show you 5 stocks that not only beat the S&P 500, they crushed it and I will explain why.
Some Surprising Companies Weren't So Recession-Resistant
People have to eat even during a recession, right? Right. And they will gravitate to lower-cost options, right? Yes, but... Let's look at 3 stocks you'd think would have done well during the last recession: McDonald's, Costco and Wal-Mart.
Of these 3, McDonald's stock did the best losing only 1.0% compared to Wal-Mart's 12.5% drop. Even Costco fell 9.8%. Business-wise, Wal-Mart actually held up the best, but was punished the most of these three. And all three are dividend paying stocks. So, why did they fall?
Because their customers were not recession-resistant. They reduced their purchases and sales at all three companies declined.
5 Recession-Resistant Companies
These five stocks that crushed the S&P 500 don't pay dividends. But either their customers are more recession-resistant or these companies provide services that their customers especially value during an economic slowdown. The 5 companies are Chipotle Mexican Grill (NYSE: CMG), priceline.com (NASDAQ: PCLN), Amazon.com (NASDAQ: AMZN), Rackspace Hosting (NYSE: RAX) and Baidu (NASDAQ: BIDU). The following graph shows how they did vs. the S&P 500 and also compared to McDonald's, Costco and Wal-Mart.
The worst performer of these 5 recession-resistant stocks, Chipotle, was up 66.4%, while the best performer, Baidu, was up nearly 160%. Collectively, these stocks beat the S&P 500 by 19-45 times.
The market rewarded these companies because they all grew their sales and gross margins despite the Great Recession. Sales increased from 15-39% and gross margins from 18-37%. A head-to-head comparison: while McDonald's sales dropped some 8% and their gross margin decreased 4%, Chipotle's sales increased 15% and their gross margin increased nearly 31%.
How Did these Companies Thrive Despite the Great Recession?
Chipotle's typical customers were (and are) more affluent than McDonald's, that is, more recession-resistant. Priceline.com offered its customers a way to reduce the cost of travel. Amazon.com allowed its customers to buy everything for less, from poultry-flavored dog toothpaste to microwave ovens, all shipped free to their homes. Rackspace provided its customers with a reliable alternative to making capital investments in essential, but non-core, equipment to store their data and “fanatical support,” which allowed companies to safely trim their IT staffs. Baidu offered its customers a better way to find everything from information to lower-cost suppliers.
That Was Then, What About Now?
None of the above reasons for the success of these recession-resistant companies have really changed. Wealthier people will always want what they want when they want it. Make things cheaper and people will buy more of it. Economic stress takes a toll and people need to relax. Relaxing is easier when you know you are getting a good deal. Businesses always like to reduce costs, especially during slow times. With the business slowdown in China, I would expect Baidu's advertisers to negotiate lower pricing, cutting into Baidu's margins. They will grow, but probably not like in the last recession.
Bottom Line
I like all these companies. Priceline.com is a good buy. As I recently wrote, Chipotle could be in for another 20% tumble, so I'd wait until after their next earnings report. The others are all great businesses and will reward investors.
p366 owns shares of Rackspace Hosting, Baidu, and Priceline.com. The Motley Fool owns shares of Amazon.com, Baidu, Chipotle Mexican Grill, and Priceline.com. Motley Fool newsletter services recommend Amazon.com, Baidu, Chipotle Mexican Grill, Priceline.com, and Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
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