A 10-Year Comparison Of Booking Holdings And Expedia

Nov. 04, 2019 8:43 AM ETBooking Holdings Inc. (BKNG), EXPETRVG25 Comments16 Likes
Robbert Manders profile picture
Robbert Manders
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Summary

  • The companies are quite similar and their gross booking volumes are quite comparable.
  • Over time, Booking has shown a much better revenue growth than Expedia.
  • Booking is also much more profitable than Expedia, which barely increased earnings over the past 10 years.
  • One area in which Expedia has outperformed Booking is the valuation (not totalreturn) of its stock.
  • Thestock markets sets the bar low for Booking Holdings which is a better buy thanExpedia.

Expedia (NASDAQ:EXPE) and Booking Holdings (NASDAQ:BKNG) are the top companies in their field with similar well-known challenges. In fact, they are so similar that the company description tables on Seeking Alpha are almost identical. Can you tell which one is which?

Source: Expedia, Booking.

If it weren't for the fact that Expedia was founded in 1996 and Booking in 1997, no one could tell. The core OTA (Online Travel Agency) product is also quite similar. An important difference is that Booking is much more international than Expedia, which has a stronger presence in the US. There are also some differences in the product mix, such as Expedia leaning more towards package deals, and Booking on just accommodation.

To properly get a grasp of how the companies compare, I start with a review of revenue and continue from there to margins and valuation. Closely looking at bookings and users is a good start.

Users and bookings

At Booking, gross bookings in 2018 were about 10 times what they were 10 years ago. At Expedia, bookings are about 4 times what they were in 2009.

Gross bookings Expedia and Booking

Data source: respective company filings. For Expedia, core OTA was used.

Gross bookings are important, but give an incomplete view of underlying developments. In addition there are users, number of accommodations, and revenue margin to take into account.

Revenue margin is an especially important metric, as capturing a higher revenue from gross bookings shows competitive strength. Lowering revenue margin is essentially lowering prices to attract suppliers (accommodations) which, in turn, drives revenue growth. I have gathered revenue margin data for Booking and Expedia below.

10-year revenue margin Expedia and Bookings

Margin on gross bookings. Source: author's own calculations and company reports.

As the chart shows, Expedia has seen revenue margin decline over the past 10 years, while Booking has saw it increase. The picture could be partially affected by mix effects but this doesn't seem the case, certainly in the case of Expedia. Expedia's HomeAway division, for example, reported a revenue margin decrease from 11.5% in 2015 to 10.2% in 2018 and the share of hotel bookings (usually higher margin) within Expedia's gross bookings has remained quite stable over the years. It looks like this decreasing margin over time is a conscious strategy to attract business (suppliers) at the expense of margins, as it communicated in 2015 when it lowered revenue margin to attract more business.

Expedia tries to attract more business from hotels and other accommodation providers by undercutting Booking. This makes sense from a long-term strategic perspective as its edge is not in attracting higher gross bookings, as it seems.

While Expedia's strategy has been to attract business customers with low pricing, it has been Booking's strategy to attract users towards its platform. Getting users in turn helps to attract hotels, as Booking's huge traffic is hard to ignore for hotels that want to fill their rooms.

Another structural reason that explains at least part of the margin difference is the relative popularity of each in the US. In the US, a few large hotel chains are very dominant, while in Europe and Asia, the hotel market is extremely fragmented. In Europe, many hotels are family-owned. In Italy, for example, only 5% of hotels in Italy are chain-owned according to Horwath HTL. For comparison websites, that is great as smaller hotels have less brand power and are more reliant on (online) travel agencies for traffic. The table below shows cumulative monthly visitors for the major websites of BKNG and EXPE both in the US an internationally.

* Total for Booking websites Booking.com, Priceline.com, and Agoda.com. Expedia websites represented are Expedia.com, Hotels.com, HomeAway.com and .co.uk, .ca, .jp, .de, .it, .fr, .es extensions for the main Expedia website. Source: author's own calculations. Data source is SimilarWeb (August).

Though Expedia uses many country extensions that are not accounted for in the table above, the difference in the number of visitors is striking. The visitor trend is at least as interesting as the number of visitors. Google Trends can give us a fair insights into the relative popularity of search terms or websites. For this analysis I picked Hotels.com and Booking.com in the US, the home market of Expedia and its hotels.com subsidiary.

Data source: Google Trends. Website (rather than search) trend data was used.

As it looks, Booking.com has overtaken Expedia's Hotels.com brand on its home turf. At the same time, Booking is dominating internationally. This global prominence has made Booking an unbeatable powerhouse when it comes to booking hotel accommodation online. Consumers from all around the world use Booking, while supply is also global. This is a virtuous cycle. As an OTA gets larger, it is increasingly harder to ignore for accommodation providers and in turn for consumers looking for the best comparison.

Profitability

The trends described above impact profitability. The chart below shows the EBIT margins of Booking and Expedia. We can see that while Booking's EBIT margin increased sharply in the earlier years in this chart before stabilizing, Expedia's EBIT margin has done de opposite. This is somewhat inline with the revenue margin pattern we have observed earlier on.

Source: author's own calculations using EBIT divided by revenue as compiled by Seeking Alpha.

EBIT margin is just a part of the story; by itself it's not necessarily an informative financial metric. What is most important is the return on capital or return on equity. That reveals the true value of a business and its competitive power versus peers.

Source: author's own calculations.

Booking has seen a consistently superior ROE to Expedia over the past 10 years. Combined with the fast growth of both companies, we can guess which company has seen the best free cash flow development: Booking Holdings.

Adjusted FCF is defined as Operating Cash Flow - Stock-based compensation - CapEx. Source: author's own calculations.

To Expedia, it's quite disappointing that over the 10 years, Booking has enjoyed both superior revenue growth and superior returns. Unsurprisingly, this has left Booking with a huge and fairly constant cash flow growth of close to $0.5bn annually. Expedia's cash flow has not grown materially. One thing that has grown materially is the valuation of Expedia. This is shown by the two charts below.

FCF is adjusted FCF as defined above, FCF yield is FCF per share in a given year, divided by average stock price of that year. Source: author's own calculations.

The valuation of Expedia is expressed in its FCF yield. From 2009 to 2012, Expedia was relatively cheap and traded at an (adjusted) FCF yield of about 8% to 12% (this can be somewhat distorted by the spin off of TripAdvisor in 2011). Booking, shown below, was more expensive and traded at a yield close to 5% ever since 2010. Remarkably, the market has started to value Expedia at more expensive (lower) FCF yield than Booking from 2014 onwards. The reason may well be that Expedia's revenue CAGR has been slightly better from 2014 to 2018. However, Expedia's EBIT and EBITDA already smaller margins have contracted since 2013 while the margins of Booking have remained stable.

FCF is adjusted FCF as defined above, FCF yield is FCF per share in a given year, divided by average stock price of that year. Source: author's own calculations.

Analysts sometimes say that Expedia has a hidden strength, in that it overspends on marketing (51% of 2018 revenue) versus Booking (34% of 2018 revenue). The idea is that when Expedia drops its marketing spend, margins will increase. I think that the example of what happened at meta search website provider Trivago (TRVG) is telling enough. Trivago did manage to increase margins by reducing advertising spend, but at a great cost. Trivago's TTM revenue is now 23% below its peak of Q1 2018 (in USD) and the stock fell over 50% in the past twelve months. It seems that you can't have your cake (revenue growth) and eat it too (healthy margins). The exception is Booking, which has grown spectacularly while increasing margins over the past 10 years.

Valuation

The last section touched upon FCF yield, but there are various multiples that can add more color to the picture. Booking's EV/EBIT and EV/EBITDA multiples started at a more expensive point in 2009/2010 but Expedia's multiples have expanded more. The most stable multiple for Expedia is P/Sales.

Valuation Booking Holdings

Valuation expedia

Price or EV is of the reported year, as are the financials. FCF yield uses the adjusted FCF as defined earlier in this article. Source: author's own calculations. Underlying data was sourced from Seeking Alpha.

The story that is told by the tables above is that expectations for Expedia started out low, but are not higher than for Booking. The table below includes forward looking P/E multiples for Expedia, Booking and some peers. On forward GAAP P/E, Expedia is still materially more expensive than Booking, which is the cheapest of the peer group. Apparently, investors rather dream about a turnaround story than betting on a company that has proven itself already.

Source: Seeking Alpha.

Strategic stakes

Both Expedia and Booking have stakes other major public companies. Expedia has a stake in Trivago, a metasearch website, which it spun off in 2016. Booking has an investment in Ctrip (CTRP), a leading Chinese OTA. In both cases, there is a strategic advantage involved. For Booking, having equity in a partner in the opaque but fast-growing Chinese market is of great value. In the case of Expedia, Trivago is a tool to attract European travelers.

Expedia owns 59.5% of Trivago which hasn't had a great three years since the IPO.Trivago stock price chart

Trivago stock price chart. Source: Seeking Alpha.

The holding of Booking, Ctrip, has done better, but like EXPE and BKNG, CTRP has been moving sideways, mostly. The more important difference is the underlying fundamentals. Ctrip has seen revenue increase at a CAGR of 40% over the past 5 years (SA data) and it is profitable. Trivago has seen a sales CAGR of 31% (in EUR) over the past four years but a decline in YTD sales in an (admittedly successful) effort to produce a small profit. This has not pleased its shareholders as they now realize that the combined growth and profit potential of Trivago is not what they thought it was.

Google as a rival

Some think that Google's foray into online hotel bookings is a threat to Booking and Expedia. I think that Google will limit its efforts as it is at risk from an antitrust point of view. This also limits synergies between Google Search and Google Travel. We have seen fines for Google abusing its power as a search engine with Google Shopping. Apart from that, not everything that Google tries is bound to be a success. Despite the fact that every Gmail user was signed up for Google+, it failed and Google pulled the plug after 7-8 years. Another reason for Google not to pursue travel too aggressively is that Expedia and Booking alone pay Google Search billions a year for ads. Expedia and Booking each spend over $4bn on direct marketing and performance marketing, respectively. Much of that is online ads, and much of that goes to Google. Meanwhile, the net profits of the OTAs are relatively modest compared to their marketing spend. Expedia made $400m in 2018, while booking had a net income of $4bn in that year.

Where is this going?

Last but not least, we must reflect on how these companies are developing. Clearly, Booking has shown an amazing performance over the past 10 years and is valued at a FCF yield of 5%. Given that investors desire a cash return of 8%, the company has the straight forward task of growing FCF by ~3% per year in order to justify its current valuation. The global economy is growing at a clip of 3%-3.5% according to the latest projections by the IMF. In a growing global economy, the global travel market logically outperforms global GDP growth as (international) travel is a luxury product and increasing wealth per capita means more spending on luxury products. Also, online bookings as a percentage of total bookings will most likely keep increasing. This dynamic has driven revenue at Expedia and Booking in the past, and it will keep doing that in the future. The chart below illustrates how online booking gained share in the accommodations market during 2004-2015.

Source: Booking Holdings Investor Presentation.

Another thing we observe in the chart is that the market is cyclical but so far this cyclicality has been assuaged for OTAs due to a rapid gain of online bookings. We must beware that in future downturns online bookings (in USD terms) are more likely to decline because the relative online share gain will sooner be offset by an overall bookings market decline.

Circling back to the topic of desired growth rates: if Booking needs a 3% growth based solely upon stock valuation, Expedia has growth targets that are double that of Booking. Given that FCF yield is at around 2%, Expedia must grow by 6% per year to provide investors with an 8% total return. Of course, Expedia can't - and shouldn't want to try to grow at twice the speed of Booking. The most important revenue driver, room night growth, has been 11% YoY for both companies in H1 2019. It is not completely unlikely that at some point, Expedia will want to show its shareholders what kind of margins it is able to produce. If it does so, that will be beneficial to Booking.

Conclusion

Over the past 10 years we have seen an extraordinarily strong Booking Holdings outperform Expedia on just about every important business and financial metric. Oddly, the one field in which Expedia has overtaken Booking, is the P/E of its stock. The strength and profitability of Bookings business is very attractive and it makes the stock a better buy than Expedia, in my opinion, regardless of valuation. The fact that Booking is valued more cheaply by the market confirms that it is a better buy than Expedia.

This article was written by

Robbert Manders profile picture
2.22K Followers
Dutch speakers can now also follow me on Twitter.Besides being a fundamental value investor, I have a master's degree in Finance, have been investing myself for over 10 years, and have equity analyst experience at a top Dutch buy-side institution. I live in the Netherlands and will share my European perspective on stocks worldwide.
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Disclosure: I am/we are long BKNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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