TripAdvisor is increasingly having something in common with airline companies that's not a good thing: negative operating leverage.
Operating leverage is a yardstick for judging if a company is getting good value for its costs.
TripAdvisor is expecting that its expenses will outstrip its revenue growth, which means its operating leverage will be negative.
This is common in the airline industry, which has to outlay huge investments in new aircraft. In case you haven't noticed, airlines rarely enjoy a sustained profit.
The Financial Times is skeptical
The most-read section of the Financial Times is its Lex column, and this week Lex analyzes TripAdvisor's prospects in a piece headlined "Pack for rain."
The FT's editors draw a few dots and predict that Google will challenge TripAdvisor directly in user-generated travel reviews and opinions.
The editors predict that European regulators will reject TripAdvisor's claim that Google must be regulated to prevent the search giant from abusing its market dominance.
So TripAdvisor will probably have to defend against Google's coming challenge on its own. In anticipation, TripAdvisor's management has noted that its marketing and technology investments will have to rise to keep user acquisition levels high.
As the FT puts it, "Has growth become permanently more expensive for TripAdvisor?"
The inference is, yes.
For instance, in the second half of this year, TripAdvisor will launch on its first TV advertising campaign at a cost of about $50 million. The campaign will advertise TripAdvisor's new hotel metasearch tool—the creation of which itself will be a hit to the bottom line.
The Google threat
TripAdvisor is being forced to boost its investment in the TripAdvisor business, negatively impacting its 50% operating margins. TripAdvisor earns on average $45 per 1,000 page views.
If Google steals away customers by boosting its user-reviews content, the number of page visits per user may slightly decline in the future, according to Trevis, a data firm:
Rising user acquisition costs
TripAdvisor also faces a decline in the per-click commission fee paid by Expedia, and will have to replace those fees with business from other clients to maintain its high margins on click-based advertising—which drives 75% to 90% of its revenue.
To generate referrals, the company is looking to supplement with social acquisition, and has already begun shifting its spending from search-engine marketing to social media networks.
With over 32 million logged-in Facebook users, TripAdvisor's TripFriends is the second most popular application on Facebook, says AppData. That's promising.
Of course, the markets are bullish on TRIP, and the current stock market valuation seems to price in that operating margins will remain above 50%. Or else investors assume Google will buy TripAdvisor—a tantalizing idea that didn't get acknowledged by the FT's Lex.