These Two Scenarios Might Significantly Expand Expedia’s Valuation

Expedia’s Growth Through Consolidation

The travel market is valued at $1.3 trillion currently, and Expedia (NASDAQ: EXPE) commands almost 5% of the market. ^[1] If we look into the past couple of years, the forerunners in the online travel space have been growing through acquisition. The rule in the OTA space seems to be: the bigger the scale and the more diversified the offerings, the higher  the chances are of generating profitability. Expedia’s management believes that the consolidation in the online travel space will continue this year as well. (Read about Expedia’s major deals in 2014 here).

The North American Online Travel Market Scenario

The North American online travel market is forecast to grow at the slowest pace between 2012 to 2017, compared to other major economies, at 7% CAGR. Nevertheless, with estimated revenues of over $200 billion in 2013, it remains the biggest online travel market in the world and is expected to maintain an important position at least for the next few years. ^[2] About three-fourths of the North American online travel sales are generated in the U.S., where Expedia is the market leader with over 40% share of bookings.

Expedia’s Position In The U.S. Market

Expedia might own up to 75% of the U.S. online travel market as a result of its Orbitz acquisition, according to the 2013 market shares provided by PhoCusWright. However, online travel agencies (OTAs) together account for 16% of total gross travel bookings from the U.S. ^[3]

In this article, we talk about the market consolidation which Expedia might attain in North America after its Orbitz acquisition. We also talk about some of Expedia’s acquisitions that might positively impact Expedia’s stock price in the future.

We have a price estimate of $103 for Expedia’s stock, which is at a slight discount to the current market price.

See Our Complete Analysis for Expedia Here

Travelocity Acquisition Can Improve Advertisement Revenues (~10% Upside)

In January 2015, Expedia acquired Travelocity for $280 million, from its parent company Sabre Corp. The acquisition is a progression from the 2013 strategic agreement between Expedia and Travelocity, wherein Expedia provided content, inventory, customer service, and technology to Travelocity’s U.S. and Canadian websites, while Travelocity focused on brand marketing and received a performance-based marketing fee. The acquisition pertains to Travelocity’s websites in the U.S. and Canada. Expedia intends to retain the Travelocity brand, alongside Expedia’s signature brands such as Hotels.com, Hotwire, Venere, and so on. The Travelocity brand name will further help Expedia in acquiring the former’s loyal customer base that approximately amounts to 20 million. ^{[4] [5]}

Travelocity has 16% share in the U.S. OTA market, which Expedia has more or less captured through the partnership. Expedia is now ramping up media sales on Travelocity sites. Advertising and media is a high-growth, high-margin, and less capital intensive business, compared to the  hotel and airline bookings business. ^[6] We believe that Expedia stands to gain more since it has not only eliminated some competition, but also created an additional distribution channel for itself. Further, the increased scale of operations after the acquisition is expected to help Expedia to negotiate better terms with inventory suppliers and deliver cost savings at the same time.

We currently forecast Expedia’s advertising and media revenue to increase from around $450 million in 2014, to cross $1 billion by the end of our Trefis forecast period. However, if Travelocity helps boost the revenues from this segment even further in the future, to reach $2 billion by the end of our forecast period, then there can be a 10% upside to our price estimates for Expedia.

 Orbitz Acquisition Can Lead To Better EBITDA Margins For Hotel Booking (~15% Upside)

In February 2015, Expedia announced its intention to acquire Orbitz Worldwide, the Chicago-based online travel agency (OTA) responsible for brands like Orbitz.com and Cheaptickets.com. Expedia expects the deal to close by the second half of 2015, once regulatory approvals are achieved. ^[7]

Orbitz currently has $12 million in gross bookings. Also, the Orbitz partner network and Orbucks loyalty program would be beneficial for Expedia’s growth. Orbitz’s airfare search technology is one of the most advanced for combining fares across different airlines. These factors would propel an increased number of hotel partners and air ticket buyers on the Expedia platform, and eventually lead to a bigger scale for its operation. ^[8]

Expedia’s partnering hotels might witness a rise of commissions which they pay to Expedia, with fewer OTAs available in the marketplace, after the Orbitz acquisition.  Wotif, after being acquired by Expedia in 2014, is already increasing the commissions it charges to accommodation operators in Australia and New Zealand, from 12% to 15%. The hotels would also need to put in a greater effort to attract customers to directly book from their own websites. The clout of a consolidated OTA entity will be significantly greater.

We currently forecast Expedia’s EBITDA margin on hotel bookings to gradually increase from around 17% in 2014 to around 18% by the end of our Trefis forecast period. However, the Orbitz acquisition and Expedia’s subsequent consolidation in North America (with an almost 75% market share in the U.S.) can help Expedia to charge higher hotel commissions. This might boost Expedia’s EBITDA margin on hotel bookings even further, to reach 19% by the end of our forecast period. Given that scenario, there can be an almost 15% upside to our price estimates for Expedia.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Expedia (EXPE) CEO Dara Khosrowshahi on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, February 6, 2015 [↩]
2. The New Online Travel Consumer, Euromonitor, February 2014 [↩]
3. Expedia Will Pay Orbitz $115 Million if Antitrust Complications Scuttle Acquisition, Skift, February 13, 2015 [↩]
4. Sabre and Expedia Announce Expedia’s Acquisition of Travelocity, Expedia Press Release, January 23, 2015 [↩]
5. Expedia Acquires Travelocity for $280 million, Skift, January 23, 2015 [↩]
6. Expedia’s Q1 2014 Earnings Transcript, Seeking Alpha, May 2014 [↩]
7. Expedia to buy Orbitz in cash deal worth $1.6 billion, tnooz , February 12, 2015 [↩]
8. You’re About to Lose Choices in How You Book Travel. What the Expedia/Orbitz deals Means For You, View From The Wing, February 12, 2015 [↩]