When it comes to traveling, Expedia Inc. (NASDAQ:EXPE) needs no introduction. The company operates as an online travel agency. It sells travel products and services acquired from a variety of hotels, commercial airlines, cruise lines and car rental companies. While travelers know about the company very well, investors should be familiar with the company as well since it offers a great profit potential. In the past one year, the company has given its shareholders a price return of more than 80%.
This price return is backed by gross billings of more than $40 billion for the company which shows its success. Yet, the global market share of Expedia presently is less than 4%. This fact alone should be enough to give investors an idea of the future potential of this company. Expedia has reported another successful quarter this month. In this article, I will briefly go through that performance highlighting the major components. Later, I will discuss the future upside potential Expedia has to offer.
Total revenue of Expedia increased to $1.5 billion delivering a year-over-year growth of 24%. Hotel and air, the two main product streams grew by 23% and 22% respectively. The increase in hotel revenue came from a 28% increase in room nights booked supported by a 2% increase in the average daily rate "ADR".
As you can see, higher bookings prevailed and ADR improved by a very low margin. This trend is expected to continue in the longer run. This is because hotel discounts and loyalty programs are growing significantly to attract tourists, hence keeping ADR growth relatively low. Another support of my view comes from the fact that 93% of Expedia's sales come from leisure travelers with only 7% being corporate or business travelers. Leisure travelers value discounts and cheaper deals. Hence, it is important for the company to keep ADR low to keep hotel accommodation attractive in front of the larger segment.
Gross margin for the quarter improved 169 bps to 79.9%. Higher cost for credit card processing (due to increase in merchant bookings) was offset by the higher volume sold, leading to a 26.7% year-over-year increase in absolute gross profit. Following a similar trend, operating margin improved by 207 bps as all costs except marketing fell as a percentage of sale. Higher marketing is needed to retain customers so it shouldn't be much of a concern, especially since it is driving a healthy top-line growth for Expedia.
The net result of the above statistics was that the diluted earnings per share grew from 31% to 67%. All in all, the quarter showed a truly strong operational result in which both revenue and profit improved, courtesy of increased bookings and cost control. In the coming times, there is no obstruction in Expedia's way to become a top performer.
This is because Hotels.com of Expedia is the leading hotel specialist in the world and has its branches in 60 countries. This not only helps Expedia market itself more effectively and attract a wider customer base, but also allows it to form alliances with a greater number of hotel chains in different countries.
Also, the company is taking care of the domestic market with wise strategic moves. It recently got into a partnership with Travelocity through which Travelocity will now become an extra distribution channel for Expedia. The agreement will help Expedia fight the growing competition from Priceline (NASDAQ:PCLN) in the US. It should also help the company in grabbing additional market shares from other competitors.
While Expedia drives more than half of its revenue from the US, the international markets offer tremendous opportunity to grow. This can be seen through the growing revenue contribution from the international markets. From 24% in 2006, it has grown to 47% in 2014. The acquisition of Trivago in 2013 also continues to help Expedia in elevating its top line. Trivago has over 600,000 hotels across 140 booking sites in 30 countries. It has a significant presence in many European countries which is of strategic importance to Expedia.
The company's car rental business is also going to benefit from the latest acquisition of the Auto Escape Group, which is made up of 2 European car rental brands. The acquisition will join Expedia's CarRentals.com, and will help in the growth of the company's global car rental business considerably.
The benefit from these moves is going to be doubled keeping in view the expanding market. Though 78% of the US population uses the internet presently, the proportion of Europe's population online is close to a lesser 61%, while the internet penetration in Asia is still very low at 26%. As a growing number of people move towards using internet and gradually booking travel online, Expedia should reap benefits.
Profit-yielding acquisitions and expanding markets coupled with strong advertisement have helped Expedia deliver a three-year revenue growth averaging 16.3%. This has been above peers who have delivered only 7.6%. Similarly, a return on equity has been strong at 16.6%, way above the competition. With the latest 20% increment in dividend, Expedia is a perfect investment to bet your gains on. It holds a significant profit opportunity, and therefore gets a strong buy rating.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.