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Expedia in Its Place: A Stock Worth Holding To

April 28, 2014 | About:

Expedia Inc. (EXPE), with over $39 billion in annual gross bookings, is one of the largest online travel companies in the world. Through its web portals, with a supply portfolio of over 200,000 hotels and 300 airlines, Expedia brings suppliers and consumers together, focusing on three areas: travel planning, travel purchases and travel experience sharing. The company’s brands include Expedia, Hotels.com, Hotwire, eLong in China and Egencia.

The company generates revenue mainly through operating models: Agency, Merchant, and Advertising and Media. Expedia acts as an agent accepting bookings from customers and transferring them to the relevant airline, hotel, car rental company or cruise line, picking up commission. Under the Merchant model, it operates as a marketing manager of its supplier partner and sells services to customers.

Finally, revenue generated from Advertising and Media derives from the advertisement fees charged to different companies in all Expedia’s websites. The company works primarily with leisure travelers; however corporate customers’ demand is increasing, and during 2011 it jumped 64.0%, helped by acquisitions.

The company reported strong results for last fourth-quarter, beating estimations on both bottom and top lines. Adjusted earnings were up 52.2% year over year, and revenue of $1.15 billion was up 18.2% previous year. A global stronger travel market along with the acquisition of VIA and Trivago pushed up the top line. The Expedia affiliate network, Egencia and eLong also contributed, while the Hotwire brand remained weak.

International Expansion and Online Booking

Booking travel online is a trend that continues expanding, and Expedia is indeed the dominant online travel company in the U.S., and a strong international player as well. The massive network effect Expedia has created, with one of the largest suppliers' portfolios, continues to attract travelers and customers, reaching 50 million unique visitors of websites per month. Through this network effect, Expedia has managed to maintain its market share in the U.S, despite the strong competition posed by companies like The Priceline Group Inc. (PCLN).

Still, Priceline.com has a solid presence within the international markets, and its international revenue growth of 40% in fiscal 2013, surpassing the 23% growth reached by Expedia. The company expects to develop further its international revenue through different acquisitions, such as the majority ownership position in e.Long, and the meta travel search engine Trivago.

Seeking to grow the business, Expedia has developed an effective quantitative model which helps to study customer behavior and spending patterns, as well as the company’s success rates. Adjusting its offer to these different customers' preferences, Expedia has enhanced its portfolio and its wealth of choices, helping attract more customers, which in turn generates revenue growth and margin expansion.

The expanding international business has led the firm to improve its technology platform. Additionally, the increasing outsourcing activity and travelers’ trips across the world have presented strong growth opportunities for companies within this industry. To capitalize on this opportunity, Expedia has added inventory, started collaborations with local players and increasing its marketing strategies. To further expand its international business, Expedia has acquired the European agency Venere, along with German metaserarch company Trivago, and it has also tied up with Accor, one of the leading hotel operators in Europe. Within its Asian strategy, the acquisition of stake in Chinese company eLong and local Vietnamese ecommerce company PeaceSoft are expected to help expand the company’s presence within these markets. The partnership with Thomas Cook India, along with marketing campaigns, is intended to increase brand awareness in this emerging market.

Competition

Macroeconomic uncertainty and the European crisis have indeed affected companies within this industry, with flat average daily rates (ADRs). However the situation seems to be improving, with higher volumes of customers. Still, the surge in sales has led to more aggressive marketing strategies, boosting marketing costs and therefore impacting negatively on margins.

Google Corp. (GOOG) has recently started to explore the online travel market, and the appearance of a competitor such as Google is likely to increase costs for Expedia. Along with ITA Software technology Google will be able to provide sophisticated flight information services to customers, offering comparison shopping for airline tickets, challenging Expedia within its market. So far, Google is not entering the travel business and it will not be earning money on tickets sold. In 2013 alone, the travel and tourism market accounted for $450 billion in revenue, and analysts expect the field to grow by 3.5% by the end of 2014. Grabbing hold of just 10% of the travel and tourism market share would nearly double Google's $59.9 billion in revenue and could make for some serious profits. However, Google's foray into online travel could harm the company's relationship with Priceline.com and Expedia, both significant customers of Google. Nevertheless, it will keep receiving money on advertisements sold in the process, and Google's search engine could drive higher sales for online travel agencies by pulling more customers online and materially changing offline buying habits.

Bottom Line

One of the main concerns every travel industry company has is the cyclicality of its market. Economic turmoil can reduce travel budgets and customers’ discretionary spending, hurting margins. Moreover, intensified competition could hurt the company as well, and as Expedia generates a fair amount of its traffic from Google, travel-specific search engines, and TripAdvisor, a change in search engine algorithms could lower the traffic driven to Expedia's websites. Still the company has reported a strong fourth quarter, and is growing its domestic and international business. The sector is growing rapidly and Expedia has a strong presence within the sector.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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