Key Points
Starboard Value just disclosed a 9% stake in Tripadvisor.
The stock costs 38 times earnings, but profits are growing quickly, and so is free cash flow.
Starboard scored a quick gain on Tripadvisor — but the stock has even more room to rise.
Tripadvisor (NASDAQ: TRIP) stock galloped ahead 18% through 11:05 a.m. ET Thursday after activist investor Starboard Value disclosed that it has taken a 9% stake in the travel advisor.
Calling the company “undervalued” (at the time it bought the shares — we’ll have to see if it remains undervalued now that it’s up 17%), and “an attractive investment opportunity,” Starboard plans to meet with management to discuss ways to improve the stock’s price even further.
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Although I have to say, a 17% one-day prop is already quite an improvement!
Image source: Getty Images.
Momentum investing
Tripadvisor’s an excellent prospect for the kind of stock that can be moved suddenly by a surprise headline. It was valued at less than $1.8 billion before today’s announcement, so it only cost Starboard $160 million to build its 9% stake.
After the announcement, the stock has already gained more value than Starboard put into it.
Is Tripadvisor a buy?
Priced north of $2 billion today, Tripadvisor represents a potentially compelling value proposition. The company’s debt load is modest — only about $105 million. And while the stock costs nearly 38 times trailing earnings, analysts forecast Tripadvisor will also earn nearly $105 million next year, with even stronger free cash flow. Even valued just on the generally accepted accounting principles (GAAP) profit, the stock’s forward P/E ratio is only about 20. And next year’s earnings are expected to grow 40% compared to this year’s.
Paying 20 times earnings for a 40% grower? Yeah, that sounds like a pretty “attractive investment opportunity” to me, too.
Should you invest $1,000 in Tripadvisor right now?
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tripadvisor. The Motley Fool has a disclosure policy.
