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TripAdvisor Inc. (TRIP): Zacks Rank Buy

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Shares of TripAdvisor Inc. (TRIP) have been buoyant since spinning off from Expedia Inc. (EXPE) late last year. However, this Zacks #2 Rank (Buy), which advertises various travel offerings (hotels, cruises, flights, etc.), has gained further momentum since filing its first annual report on March 15, 2012.

Being an aggregator of user reviews and opinions related to travel, the company's database includes over 60 million reviews from over 20 million members. TripAdvisor is a global company, with 1,300 employees spread across the U.S. and 29 other countries.

Q1 Results Blasted Estimates

TripAdvisor's first quarter results (reported May 1) were very strong, with revenue and adjusted earnings growing 33.3% and 79.5%, respectively, on a sequential basis. They were also up 23.1% and 3.6%, respectively, from the year-ago quarter. Adjusted earnings were 23.3% higher than the Zacks Consensus Estimate of 30 cents.

TripAdvisor's main business remains click-based advertising, which grew a healthy 20% from last year and accounted for 79% of quarterly revenue. Display-based advertising, which fetched another 12%, was also up double-digits. Most encouraging was the subscription segment, which accounted for the rest and jumped 67%. Subscriptions bring predictability to results, so this could be an encouraging trend for the future.

The revenue growth from the prior year is indicative of good monetization. Also, the significant investment in the business (which muted earnings growth with respect to the prior year) enabled the company to increase focus on specific growth areas, such as mobile and Facebook integration.

Mobile numbers were particularly impressive (17 million mobile app downloads, 23 million unique visitors per month to tripadvisor.com through mobile devices, page views on mobile devices up more than 250% and tablet page views up more than 300%).

Facebook integration also remains on track with the company's trip planning for Facebook users touching 120 million (up 34% from the December quarter).

2012 Guidance Was Raised

TripAdvisor currently expects 2012 revenue to be slightly higher than the mid-point of the previous range (up mid-to-high teens percentage rate). Subscription revenue is expected to grow in the high double-digits, with display coming in roughly flat with 2011. EBITDA is expected to be slightly higher than in 2011.

Following the strong results and raised guidance, the Zacks Consensus Estimate for 2012 and 2013 jumped 10 cents (8.3%) and 15 cents (10.3%), respectively, over the past month.

TripAdvisor Deserves a Premium Valuation

Since both the company and the sector are in the growth phase, it is understandable that there would be significant investment in the business. Therefore, earnings/earnings growth may not be the best way to arrive at a fair value for either TripAdvisor, or HomeAway (:AWW). While Orbitz Worldwide (OWW) has been around for a while, it continues to run at a loss. TripAdvisor is the only one currently running at a profit.

Therefore, P/S appears to be the best valuation metric and TripAdvisor is trading at a slight premium to AWW in this respect, while both these companies are at a significant premium to both Orbitz and the industry. Given its growth potential, there appears to be room for further appreciation.

YTD Chart

TRIP shares are up 69.0% year to date compared to a mere 3.2% increase for the S&P 500. The strength in share prices is mainly on account of its solid performance since inception, which differs greatly from other companies going public, such as Facebook (FB) and Groupon (GRPN).

The fact that investors were already aware of its potential, when it was a part of Expedia also helped (Expedia reported and discussed TripAdvisor revenues and potential separately).

TRIP has also outdone its peers AWAY and OWW, which were up 2.7% and down 15.7%, respectively during the same period.

Trading volumes are also considerably higher for TRIP than its peers.

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