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Introduction

Expedia (EXPE) is the world's second largest online travel agency (OTA), with a market capitalization of ~$9 billion. The stock has more than doubled in the last year due to improving revenue growth. The company owns some of the leading travel websites such as expedia.com, hotels.com, venere.com and carrentals.com. The company has tie-ups with over 145,000 hotels in 100 countries and expanded into China in 2011 by buying eLong from RenRen (RENN). The company restructured its operations in 2011 by spinning off Tripadvisor (TRIP).

Like most other OTAs, the company's revenues and profits mostly come from online hotel reservations, while the rest is contributed by airline, cruise and car rental bookings. Expedia has benefited in the recent past from consolidation in the OTA industry, as the top two players have gobbled up the smaller companies. Expedia has been one of the best performing technology stocks in the last year, giving a return of ~110%. EXPE has been a laggard compared with the market leader Priceline (PCLN), but its improving topline growth has led the market to rerate the stock. However, we think that the stock has climbed up a little too fast and it might be a good time to take some profits.

Expedia Issues

  1. Valuation - Expedia's valuation has entered the expensive territory after its stock doubled in 2012. The company is trading at higher valuations than the rest of the OTA industry. The company trades at a P/B of 3.7x and a P/S of 2.4x, which is higher than the industry average. The trailing P/E of ~25x is also 10% higher than the industry average. The company's dividend yield is only ~0.6%, which is not good enough from a dividend investor's perspective.
  2. Competition is growing - Expedia faces increasing competition from traditional as well as new entrants into the travel segment. Priceline, which used to be a smaller player than EXPE, has a current market value which is 4 times larger than that of EXPE. Other big companies like Google (GOOG) are also entering the travel space attracted by the large profits and synergies. Facebook (FB) is trying to increase monetization of its massive Internet traffic by entering traditional money-spinning segments. The company recently introduced an Internet Search product. A travel product might also be introduced soon. This will pose a major competitive threat to EXPE and other online travel players.
  3. Fast Changing Technology Trends - Technology is a fast changing industry and companies have to be on their toes to manage the new innovations. Even in the OTA industry, meta search has led to a drastic change as users are preferring meta-search engines over OTA websites. Expedia has already shelled a large chunk to acquire Trivago. New innovations are a constant threat to Expedia's business model.
  4. Low Margin Growth in Asia - Expedia is growing strongly in Asia, where the typical revenue and margin per booking is much lower than its home market. This will drag down the overall margins of the company. Besides this, the company also faces threat from local companies that understand those markets better such as Makemytrip (MMYT) and Ctrip (CTRP). Expedia also faces competition from its own hotel and airline suppliers that want to sell directly to consumers
  5. Fluctuating Margins - Expedia has not maintained a steady margin with its past 10 year history, showing sharp ups and downs. The operating margin has fluctuated in the 10-20% range without showing much consistency. In comparison, Priceline has grown margins at a steady rate, with operating margin of 32.1% in 2011.
  6. Inferior Revenue Growth - Expedia has shown an inferior revenue growth compared to the rest of the OTA till 2009. The company's topline growth underperformed that of PCLN as the company did not focus on international operations. The last 2 years have seen growth accelerate to around ~15%, but that is still just par for the OTA industry.

What we like about Expedia

  1. Increasing International operations - Expedia was always a strong US online travel player but did not have strong international operations. However, the company seems to be correcting that deficiency and now almost 2/5th of the company's revenues are coming from outside the US. The company recently bought a leading Chinese OTA eLong to expand into the world's most populous country.
  2. Leadership position in the OTA industry - Expedia has a leading position in the online travel industry, which is consolidating around the top two players. The OTA industry has been growing strongly despite the global economic slowdown. This is due to the continuous shift of travel to the online medium. As Internet usage increases in emerging markets, Expedia is well positioned to grow at a fast clip in these markets. The OTA industry has benefited immensely by cutting the overall costs and giving a wide variety of choices for the end user.
  3. Consolidation in the OTA industry - Expedia is rapidly buying companies to enter new geographies like Europe and Asia. It bought a ~62% stake in German meta-search company Trivago for 477 million euros, to expand into the European market. Priceline too have been buying smaller OTAs like Kayak.com to solidify its position in the OTA industry.

Stock Price Performance

Expedia stock has given a ~197% return over the past 5 years, with a 110% return over the last year. However, Expedia has been overshadowed by Priceline, which gave a ~597% return over the last 5 years. Expedia is currently trading at near its all time peak value of ~$67, after giving a good set of Q312 results. The company is expected to report Q412 results on February 5, 2013.

Summary

Expedia has made strong efforts to catch up with market leader Priceline in the last year and the company has achieved some success. It has focused on its international operations and more of the company's revenues are coming from non-US sources now. However, after the sharp stock run up, we think it might be prudent to take some profits, as the company has entered into a slightly expensive territory. The company faces growing threats from existing OTA companies as well as bigger technology companies like Microsoft (MSFT) and Google, which are trying to extend into the travel space.

Source: Expedia Doubles In 2012: Can It Do An Encore?