Sometimes one buys a share only to see its price fall badly shortly afterwards. That happened to some growth shares I bought last week. I bought into Tripadvisor (NASDAQ: TRIP) for the first time. From a high point last week as the firm announced its full-year results, the shares have since lost about 19% of their value.
So buying them, as I did, might not sound like an obviously smart move. But as a firm believer in long-term investing, I do not focus on what a share is doing in the short term.
However, over the past year, the shares are down 19%. Over five years they have lost almost half their value. So, why did I buy them?
Booming market demand
In short, it is because I think Tripadvisor has the pieces in place to help its shares soar in the coming years.
Last year’s numbers already look great: revenues grew 65% year on year and the company swung to a profit again. But despite the strong growth, revenues still came in 4% below the 2019 level. Net income was 84% lower.
Clearly though, demand for travel is back in a big way. That should bode well for revenues and profits in Tripadvisor’s core business. But what particularly excites me about last week’s results is the surge seen in customer demand for experiential travel.
Tripadvisor’s Viator division offers experiences like a scavenger hunt in Sunderland or self-guided tour of Isambard Kingdom Brunel’s Bristolian legacy. Viator revenues leapt 163% to almost half a billion dollars.
Strong free cash flow
I think the trend here is good: I expect travel demand to stay strong over the long term.
Tripadvisor is well-placed to benefit from that. It has a well-recognised travel brand. A lot of its offering is scalable: selling 100 self-guided audio tours of a city does not require much more work than selling just one. That should be good for profit margins.
But what really exicted me about the results was the firm’s free cash flow. While profits are an accounting term, free cash flows indicate the hard money coming in or going out of a business. One challenge I find when looking for growth shares I can buy is that many businesses have promising prospects — but are bleeding cash here and now.
By contrast, Tripadvisor increased free cash flows more than sixfold compared to the prior year, reaching $344m. With a market capitalisation of $3.1bn, that means the firm is trading for around nine times last year’s free cash flow.
It also ended the year with over $1bn in cash and cash equivalents on its balance sheet, although it also has sizeable debt.
Why I bought
I do see risks here. Travel demand could slow as consumers rein in spending in a weak economy. Some of the recent cash flow was due to non-repeatable items, such as asset sales.
But overall I see TripAdvisor as a company positioned to benefit from surging demand in the travel market. It is throwing off spare cash already. I think 2023 results could well be much stronger than last year’s as travel demand continues to boom globally.
Given that, these growth shares look undervalued to me. That is why I added them to my portfolio.
