Back in December 2011, online travel operator Expedia (Nasdaq:EXPE) spun out TripAdvisor (Nasdaq:TRIP) as its own public company. Shareholders that hung on to TripAdvisor are sitting pretty as the stock is up about 60% since the spinoff. The company is also growing rapidly, but similar growth levels could be hard to sustain going forward. In addition, the valuation currently reflects much of this future growth potential.

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Recent Developments
Earlier in May, TripAdvisor reported solid first quarter sales growth of 23% and total sales of $183.7 million. Advertising from visitor clicks accounted for the vast majority of the top line at 79% and grew 20%. Display-based advertising brought in another 12% of sales and improved 17%. The final revenue category was subscription-based revenue, which jumped 67%, confirming that the website's community continues to grow. Management detailed that over 60 million travel and stay reviews now exist on the site and that users are "adding content at a rate of more than 40 contributions per minute."

SEE: Earning Forecasts: A Primer

Despite the impressive sales growth, operating income only improved slightly to $73.4 million. A big jump in selling and marketing expenses was the primary culprit for the minimal profit growth. Lower income tax expenses helped net income grow a modest 1.6% to $48.2 million, or 35 cents per diluted share.

SEE: Understanding The Income Statement

Outlook and Valuation
Analysts currently project steady sales growth of around 20% for each of the next two years, with total sales reaching above $921 million by the end of 2013. The profit projections are $1.50 per share and growth of 22% to $1.83 per share by the end of next year. The forward P/Es currently stand at 28.8 and 23.6, respectively.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
TripAdvisor is growing rapidly, but the earnings valuation is quite rich and the online travel space is intensely competitive. The company continues to collaborate with Expedia, but it, along with Priceline (Nasdaq:PCLN), Orbitz (NYSE:OWW) and Travelzoo (Nasdaq:TZOO) are all out there competing for consumer attention and advertising clicks. As such, most of the upside in operational growth is likely already reflected in the share price, and there is downside risk, should growth slow or even become negative, due to the fact the industry is very crowded.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: TRIP, EXPE, TZOO, PCLN

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