We See Expedia as a $29 Stock Despite Margin Concerns
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Expedia’s (NASDAQ:EXPE) stock took a hit in the markets dropping almost 17% on the release of its FY 2010 earnings on February 10. The response was largely on account of the overall decline in the company’s EBITDA margin from over 32% in 2009 to around 25% by the end of 2010. Clearly the market is concerned about Expedia’s outlook on the heels of this. Expedia competes with other online travel agents like Priceline (NASDAQ:PCLN), Orbitz (NYSE:OWW) and Travelocity as well as hotel chains that offer their own online booking services.
Unfavorable Industry Trends But Value Remains
The online travel industry continues to face increasing competition from airlines and large hotel chains offering bookings directly at their websites leading to online travel agencies removing the booking fees to match the prices quoted by the suppliers themselves. The squeezing revenue margin (revenue earned by the online travel agency as a percentage of the dollar size of bookings) has been widely accepted as the fate of this industry going forward. However a rise in operating expenses in such a competitive market is crimping profit margins, measured by EBITDA margin, in addition to this.
We have updated our Trefis price estimates of Expedia’s stock to $29.12 factoring some lower assumptions for profit margins going forward; however we still see plenty of value left.
The two largest segments are hotel bookings that constitutes more than 55% of Expedia’s stock value by our estimates and TripAdvisor another 23%.
For the hotel segment, we forecast that EBITDA margins will trend at around 23% and slowly decrease to around 21% going forward. For TripAdvisor we forecast this will remain around 44%.
Hotel Bookings EBITDA Margin
Tripadvisor EBITDA Margin
One silver lining is that there has been much needed improvement in Expedia’s Egencia corporate travel services from under 8% in 2009 to over 12% in 2010, but it is still much below the company’s overall EBITDA margin which is still in excess of 25%.
While there is much scope for further improvement in Egencia corporate travel services EBITDA margin, given the it contributes around 4% to Expedia’s total revenues, we do not expect a significant impact on the company’s overall profits.
Nonetheless, the market seems overly bearish following this announcement relative to our estimates.