By Jeff Bailey
Expedia (NASDAQ:EXPE), since the spin-off of its travel content unit TripAdvisor (NASDAQ:TRIP) in December 2011, has been on a tear, matching the advance of its online travel agency rival Priceline (NASDAQ:PCLN) and tripling the gain in the S&P 500.
PCLN data by YCharts
The market has been rewarding Expedia for its recent run of rapid revenue growth, pushing up valuation metrics such as PE ratio.
EXPE PE Ratio (TTM) data by YCharts
But as with too many tech and online businesses these days -- we’ll mention Salesforce (NYSE:CRM) and Amazon (NASDAQ:AMZN) – revenue gains at Expedia have been painful to achieve, coming at the expense of once-lush operating margins. Let’s look back four years to before the TripAdvisor spinoff and compare margins to those at Priceline.
PCLN Operating Margin (TTM) data by YCharts
What you’re seeing mostly is the stupendous results of Priceline’s 2005 acquisition of booking.com, which put it in the foreign hotel room business. The deal was visionary and brilliant. U.S. hotel chains and airlines are highly consolidated. They don’t need travel agencies to sell tickets and rooms, and consumers don’t need the agencies to find a Hyatt (NYSE:H) or to find Delta Air Lines (NYSE:DAL). But the fragmented overseas hotel industry does need middlemen, and it pays richly when rooms are booked on its behalf.
The booking.com acquisition is one of the great pieces of M&A work in recent years, and one can hear Expedia’s envy as it describes its own business, the competition it faces and its goals in its 10-K filing:
“In particular, we have faced and are facing, intense global competition from Priceline subsidiaries, Booking.com and Agoda.com.” (Agoda is an Asian hotel booker.)
“From a product perspective in 2013, 72% of our revenue comes from transactions involving the booking of hotel reservations, with 8% of our revenue derived from the sale of airline tickets. We believe that the hotel product is the most profitable of the products we distribute and represents our best overall growth opportunity.”
“In 2013, approximately 44% of our worldwide gross bookings and 47% of worldwide revenue were international points of sale up from 22% for both worldwide gross bookings and revenue in 2005. We have a stated goal of driving more than half of our revenue through international points of sale.”
Poor Expedia. Priceline is way ahead, its international business accounting for 85% of gross bookings and 94% of operating income in 2013. (And Priceline runs most of it through a Netherlands unit, which is taxed minimally.) Expedia setting a goal of half sales coming from international seems to be aiming for mediocre returns, as it competes against a company with superior margins that keep widening.
Expedia’s stock run-up has pushed its valuation, on a traiing basis, ahead of Priceline’s, which seems to make little sense. Unleash some financial advisor tools to learn more.
PCLN PE Ratio (TTM) data by YCharts
Oh, sure, there’s the argument that in playing catch-up, Expedia has more room to run. But as we reported earlier, it appears Priceline is far more efficient in its online advertising spend -- $1.8 billion last year – and in converting visitors to its site into customers. Priceline has been refining an operation that’s already well positioned in the most lucrative travel field – foreign hotels – while Expedia is still trying to match its rival’s reach in the area; Priceline in 2013 had 425,000 properties to rent you a room from, Expedia 260,000.
[One indisputable winner in online travel is Google (NASDAQ:GOOG), as overall online advertising has become more expensive for travel agencies, letting Google keep a rising share of consumer spending on travel.]
(As we reported, TripAdvisor also seems pricey after its run-up.)
In a stock market correction, or economic downturn, both Expedia and Priceline would likely suffer. People travel less when they’re economically stressed. But the substantially superior basis for Priceline’s success might cushion it somewhat from those factors. And in a continuing upswing, it’s the swifter competitor.