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TripAdvisor: Lolapalooza In Motion?

Sometimes investors become so deeply intoxicated with concepts and compelling narratives that they fail to perceive the obvious. We saw that kind of make-believe in the course of recent disasters such as Fortress Paper, Valeant, Sears – for which I may have fallen myself – or Horsehead Holdings.

TripAdvisor could be next. Several respected money managers have spread out the fairy tale – moat induced by the network effect, non-reproducible asset, history of impressive growth but temporary setback following the rollout of a new service, elite shareholding, etc. – and, along with large buybacks, contributed to lift the stock price higher despite a neat deterioration of underlying fundamentals.

The problem is that with so much attention being paid to the upside, it is easy to lose sight of the risk. Scratch the surface and severe issues enter into the picture: marketing costs inflate and growth stagnate as the “non-hotel” segment fails to cover the critical decline in the “hotel” one, while competition from the supply-side – Expedia, Priceline, etc. – and the likes of Google escalate dangerously.

In short, TripAdvisor ends up stuck in the precarious position of the middleman, milked by those who own the tubes and undercut by those who own the inventories.

Just as worrisome, management keeps massaging earnings in a highly tendentious fashion, in particular with their promotion of adjusted EBITDA – that doesn’t take into account substantial stock-based compensation – and bogus “free cash-flow” that excludes payables to merchants by means of a handy working capital adjustment.

This is pretty much akin to adding provisions to operating cash-flows – you haven’t laid down the cash yet, but eventually you will. In that respect, is it ethical to highlight a pumped up “free cash-flow” on top of your earnings report?

Have a look and you will find none of the advertised $159 million cash earnings appear on the balance sheet – there have been no dividends and only $4 million in share buybacks. Something doesn’t add up. Where has the money gone?

With earning power nowhere near what the management reports – in fact, here vanilla GAAP earnings seem to offer a reliable picture of real profitability – you’d better pray for that margin expansion or superb top line growth to show up sometime soon. Otherwise you’re currently paying a hefty multiple for a troubled business model.

A telling anecdote: The term “adjusted” appears 51 times in the latest annual report, twice as much as in Valeant’s – 26 times – before all hell broke loose. Disturbingly, a similar dynamic is taking shape at Liberty Global, another Malone’s property where overhyped growth prospects have also failed to materialize.

At this point, the best option for the Liberty guys may be to sell the business. So perhaps they’re purposely putting lipstick on the pig in order to oil the wheels for a buyout. I wouldn’t be surprised to see a deal a la MySpace, in which a venerable media institution attempts to get its virginity back by adding a trophy asset to its online roll-up. TripAdivsor would likely fit the bill.

We’ve seen crazier things in this era of cheap money and endless “synergies”.

But hey, you never know.

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