Expedia Shows Growing Strength In Hotels And International Markets

| About: Expedia, Inc. (EXPE)
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Robust growth in hotel bookings, an expanding presence in the international market and increasing mobile application downloads are factors that helped Expedia (NASDAQ:EXPE) post solid quarterly growth despite the global economic slowdown. Expedia, one of the leading online travel agencies in the world, posted its Q3 2012 earnings on Thursday, October 25. Though net income registered an 18% decline, the company posted a 17% year-over-year growth in its revenue.

While the short-term macro situation remains uncertain with the U.S. elections, a change of government in China and the ongoing debt and euro crisis in Europe, Expedia claims not to have had any adverse effect on its brand due to the above factors, which is impressive. With a goal of growing its user base, the company aims to continue innovating and improving its products and services to drive growth in all its geographic segments.

Our price estimate of $61.62 for Expedia places our valuation at a premium of around 15% to the current market price. Here we highlight certain key trends in the quarter release that reiterate our belief in the same.

Growing Strength in Hotel Business In Asia-Pacific & Europe

Backed by a 27% increase in global room nights booked, Expedia’s hotel revenue registered a 20% y-o-y growth in Q3 2012. Despite macro headwinds, the company posted a 17% increase in domestic hotel bookings while the international bookings witnessed robust growth of 38%.

Expedia is the biggest U.S. online travel agency in terms of gross bookings, and the company has been focused on expanding its leadership position in international markets as well. Expedia’s revenue contribution from international markets has nearly doubled in the past five years, from 24% in 2007 to around 42% at present. For the first time this quarter, the international points of sale accounted for 50% of the total room nights booked.

The fragmented European hotel market and rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. Additionally, internet penetration in these economies is relatively low but is expected to grow at a rapid pace, which leaves immense potential for growth for the online travel industry as a whole.

The acquisition of VIA travel by Egencia, the Air-Asia Expedia joint venture, rising popularity of hotel.com, the collaboration with Fotopedia Paris & Fotopedia Japan, and the eLong partnership to expand presence in China – are factors that contributed to Expedia’s growth in international hotel bookings in Q3, and we believe will continue to be the guiding factors for its future growth as well.

Apart from increasing competition from Priceline, the decline in revenue per room night is one of the factors that is detrimental to Expedia’s growth in this segment. The company registered a 6% decline in its revenue per room night and a 3% decline in the average daily room rates. However, we believe that the significant growth in hotel gross bookings volume will compensate for a potential decline in the room rates and the hotel division will continue to be a positive guiding factor for Expedia’s valuation.

Increase In Bookings Via Mobile Devices

Receiving only 4% traffic through mobile bookings in 2011, Expedia aims to introduce innovative offerings in this segment to tap the rapidly expanding mobile user base. The company launched a number of applications for iPhone and Android users last year to stay in line with changing consumer trends.

Last quarter, the Hotels.com application launched an updated version for Android and iPad tablets. Expedia also launched a new update and an exclusive feature for its hotel mobile application last month. The recently launched mobile application by Hotwire gets close to 20% of its hotel bookings via mobile devices. Additionally, the Expedia application crossed the 10 million mobile app download milestone across all mobile platforms.

We expect the company to continue innovating in this space and foresee an increasing percentage contribution of bookings done via mobile devices.

Slight Increase In Expedia’s Share In Air Tickets

While the hotel division is growing strong, the airline segment has been struggling amid macro headwinds. Though the ticket volume grew by 11%, it was mainly on account of the VIA Travel acquisition and would have remained more or less flat in the absence of the same. Expedia’s revenue from air tickets was down 10% and the revenue per ticket was down 19% on a yearly basis. Though the company expects the same to normalize 2013 onwards, on account of the newer supplier agreement, we forecast the revenue margins on airline tickets to continue declining for the rest of our review period.

However, with its technology projects gaining momentum, Expedia aims for rapid innovation and fundamental changes for its air ticket business. Amidst rising competition and squeezing revenue margins, we believe that the bigger players have a better chance of survival since they are better placed in bundling different products into holiday packages and to offer complementary destination services to gain traffic. Given that Expedia is the leading online travel agency, we forecast a slight increase in its market share in the years ahead.

We are in the process of updating our price estimate of $61.62 for Expedia for the Q3 2012 earnings release.

Disclosure: No positions