Expedia (NASDAQ:EXPE) is a leading online travel agency that connects travelers with travel suppliers such as hotels, airlines, cruises and car rental companies. It operates several online travel websites, including expedia.com, hotels.com, hotwire.com and trivago.com. The company also runs a corporate travel business, Egencia, which seeks to optimize travel costs and improve the travel experience for employees of its corporate clients.
With a revenue contribution of 72% and gross bookings contribution of 46%, hotel bookings is the most important division in Expedia's portfolio. The division makes money by earning commissions on hotel reservations. In addition to accounting for a majority of its revenue, hotel bookings offer around 19% revenue margin which also makes it the most profitable division, compared to airlines (~2%) and car rentals & cruises (~8%). In this article, we highlight the key trends impacting Expedia's hotel divison.
We have a $77 price estimate for Expedia's stock, in line with its market price.
International Expansion And Broader Roll-Out Of ETP To Fuel Gross Bookings Growth
We estimate that Expedia registered a robust 25% and 23% rise in hotel gross bookings in 2012 and 2013, respectively, as travelers switched from traditional methods to online mode for reservations. Increased adoption of the Expedia Traveler Preference (ETP) program, which was launched in the back half of 2012, was also one of the major drivers that fueled the growth. ETP allows travelers to choose between paying for bookings upfront (merchant model) and paying after the stay is completed (agency model). Prior to the rollout of ETP, Expedia was predominantly a merchant model company. Hotels are adopting ETP at a fast pace since many guests prefer to pay at the time of checking out of the hotel. Over 45,000 hotels have signed up for the ETP program to date. 
With more than 40% market share, Expedia is the dominant OTA in the U.S., the world's largest travel market. However, the U.S. is also a slow growing and highly competitive market which is pushing Expedia to pursue international expansion for future growth. International markets currently account for 44% of Expedia's total gross bookings and 47% of its total revenues. The company has a stated goal of deriving more than half of its revenues from international points of sale. 
To achieve this target, Expedia is rapidly growing in Asia via its partnership with the Chinese OTA eLong. The company is building a stronger foothold in Europe also through the acquisition of Trivago, a German meta-search company that has an inventory of more than 750,000 hotels (before the Trivago acquisition Expedia had only 200,000 hotels) from more than 200 booking sites in 40 countries. 
We expect Expedia's expanding list of hotels and growing international presence to propel the future growth in gross bookings at more than 10% annually until 2016. Thereafter, we forecast the growth rate to slow down owing to increasing competition from other OTAs, meta-search companies and hotels that are increasingly selling their services online.
Rising Competition And Agency Model Revenues Will Drive Down Revenue Margins
While we expect the hotels division to register healthy growth in bookings, we estimate that its revenue margins will decline. This will be attributable to faster growth in agency model bookings as compared to merchant model bookings, as a result of the broader rollout of ETP. Revenue margins (revenue per transaction) under the agency model are lower, as Expedia simply acts as a travel agent and earns a small commission on bookings, while under the merchant model revenue margins are higher as the transaction is completed on Expedia's website itself. The waiver of processing, cancellation and change fees by OTAs and travel suppliers in an attempt to gain a competitive advantage will also drive down revenue margins. Based on these factors, we estimate revenue margins on hotel bookings to fall below 17% by the end of our forecast period.
Expansion Into Low ADR Regions Will Negatively Impact Overall ADR Growth
PhoCusWright estimates that the online travel market in Asia-Pacific grew by 18% in 2013 to $93.4 billion.  Expedia plans to continue expanding aggressively in the highly lucrative and vast travel industry of the Asia-Pacific region. While the growth in this region will increase booking volumes, we believe it will counteract ADR growth achieved by Expedia in the U.S. and Europe, because ADRs in Asia-Pacific are lower than in the U.S. and Europe.
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