Trip Advisor (Nasdaq:TRIP) is the world's largest travel research company. Busy over the past year acquiring online businesses that will broaden its scope; its buying binge continued May 7 with the announcement it was buying, a Spanish vacation rental site. Vacation rentals have become a serious part of its business. What will all these acquisitions add up to? I'll have a look.
Vacation Rental Business
Trip Advisor's first vacation-rental acquisition came in August 2008 while it was still part of Expedia (Nasdaq:EXPE). The travel site acquired FlipKey, a provider of guest reviews for 50,000 vacation rentals in the U.S. At the time of the acquisition, FlipKey's CEO estimated the vacation rental market was an $80 billion industry. While details of the transaction weren't released, it's likely the cost wasn't overly expensive. Most importantly, it got them into the vacation rental business
Less than two years after acquiring FlipKey, Expedia went out in June 2010 and picked up Holiday Lettings, the UK's biggest vacation rental website. Adding 40,000 vacation properties across 116 countries, Trip Advisor's portfolio took a substantial leap forward in terms of the number of advertised vacation rentals. Nineteen months later Expedia spun-off Trip Advisor with shareholders getting one share in the new company for every two shares held in the parent. Since becoming a public company on December 21, 2011, Trip Advisor's stock has gained 73.3% compared to 104.4% for Expedia and 31.1% for the S&P 500.

SEE: Best Places and Sites For Online Travel Deals

Flash forward two years to the end of 2012. Trip Advisor's accumulated listings for over 300,000 vacation properties, almost three times what it had in 2010. Property owners can list their rental units either through a subscription-based fee structure or at no cost with a commission-based option. Now estimated at $85 billion per year, the vacation rental business is one of Trip Advisor's four growth areas: the others being social media, mobile and business listings. While Trip Advisor generates 78% of its revenue from click-based advertising, its subscription revenue in Q1, which includes vacation rentals, grew 51% to $26 million and is now approximately 11% of overall revenue.
With the addition of, it's adding as many as 230,000 listings globally with 120,000 of those properties in Spain. The beautiful thing about the vacation rental market is that it's ripe for consolidation, yet has very little conflict with online travel agents like Expedia and Priceline (Nasdaq:PCLN) and hotel brands such as Marriott International (NYSE:MAR) and Intercontinental Hotels Group (NYSE:IHG). I could see Trip Advisor building micro sites for special events like the Super Bowl where businesses and individuals are able to book vacation rentals for the big game. The potential opportunities are limitless.

SEE: 5 Ways To Invest In Travel and Tourism

Acquisition Costs
Trip Advisor doesn't break out the cost of individual acquisitions so it's hard to know what kind of return it's getting on its vacation rental businesses it's purchased since becoming an independent company. In total it's something like $40 million not including the Spanish acquisition just announced. For a company that generated $210 million in free cash flow (FCF) in 2012, $40 million is a drop in the bucket. Also, consider that since Trip Advisor's been a public company, it's increased free cash flow by 18% annually. In the first quarter of 2013, it increased free cash flow by 54% to $34.4 million. In one quarter it's generated almost enough cash to pay for its acquisitions over the last 24 months. That's pretty darn good if you ask me.
Bottom Line
The online travel game continues to evolve. Trip Advisor walks a very fine line with companies like Expedia who slowly are becoming content creators themselves which, if successful, would serious hamper Trip Advisor's ability to generate advertising revenue from them and other online travel agents who travel the same road. 
Nonetheless, its adjusted EBITDA margin in Q1 increased 180 basis points to 47.6% while its adjusted EBITDA was up by 30% to $109.3 million. This is a business that's making some smart moves in the vacation rental business, gaining the all-important first-mover advantage. I don't think you can underestimate how much that's worth.
By the end of 2014 it should go over $1 billion in revenue with $400 million in adjusted EBITDA. By then it could easily afford to buy HomeAway (Nasdaq:AWAY), its biggest competitor. That would certainly be its biggest acquisition ever. But would it be worth it? That depends on how successful purchases like are. Either way, it's a stock worth owning. 

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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