Have Expedia, Will Travel: Expecting 15+% Upside Potential

Expedia Inc. (NASDAQ:EXPE) announced its third quarter results on November 7 (see conference call transcript). The online travel company , which owns brands like Expedia.com, Hotels.com, Expedia Corporate Travel and TripAdvisor, surpassed analyst expectations on both topline and bottomline. The company reported a revenue growth of 24% YOY to $760M. The Non GAAP EPS came to 39c, a 15% improvement from that of Q3 '06.

Online travel companies have been witnessing major growth on the European front and Expedia was no exception. European operations continue to provide stellar results with a revenue growth of 37% (30% excluding F/X impact). 47% YOY growth in European bookings was the prime contributor to the 21% YOY growth in the company's gross bookings (total retail value of transactions). With North American bookings growth remaining relatively stable, EXPE reporting that 32% of worldwide gross bookings came from Expedia Inc.'s international POS (27% in the comparable quarter), bodes well for the company. The company has already increased the number of merchant hotels in Europe to 13,000, a 12% YOY growth. This would help Expedia to maintain its revenue growth from European operations, going forward.

With Priceline.com (PCLN) eliminating the airline booking fee, EXPE may have to follow suit. In such a scenario, only a significant increase in conversion rates and cross sell of other services can offset the lost revenue. Though the company has commented that it did not see any adverse results in this quarter due to elimination of booking fee by PCLN, we believe that the company is starting to feel the pinch. It has indicated a move towards low booking fee/ no booking fee service in the European market, stating its intention to pursue an aggressive growth strategy. The company has already tested waters by following a no booking fee procedure in markets like Spain. Initiatives to strengthen the European supplier base - like the agreements with British Airways, Air France KLM and Sky Europe would be helpful for the company to pursue its growth strategy.

Advertising and Media Revenue has shown a good upward trend through the quarters of the past two years (For Q3 - 106% YOY growth to $51M). This indicates that the company is executing well its transformation towards being an online travel company from that of an online travel agency. Going forward, revenue from advertisement could see further upside, with the company launching the beta testing of TravelAds, a platform that enables hotels to bid for premium placement in hotel search results. Transactions, a key metric for assessing EXPE's performance, have been increasing through the past four quarters and reported a growth of 16% YOY in Q3. Aided by these developments, the company pegged its 2007 OIBA growth at low double digits, an improvement from the earlier guidance of high single digit growth.

Despite these positives, the stock has been on a decline post results, obviously due to broad market weakness. The stock closed at $28.5 on November 9, and has now come to pre Q2 levels. With the strong fundamentals, we expect an upside potential of at least 15% in the short-term.

Disclosure: none