Groupon Takes on the OTA Market with Expedia

Expedia (NASDAQ:EXPE) recently announced what looks like a promising partnership with Groupon. Groupon is creating a special section on its site called Groupon Getaways that will offer deep discounts to the tune of 50% on travel-related services by tapping Expedia’s inventory of hotel rooms and travel services from its 135k hotels as well as car rental and cruise options across the globe. Expedia competes with other leading online travel service providers such as Priceline (NASDAQ:PCL) and Kayak.

Like the rest of Groupon, Getaways will promote limited-time deals requiring customers to make an upfront payment in exchange for a voucher that can then be redeemed within a certain period of time.

We value Expedia with a $30.60 Trefis price estimate of its stock and think this move could add additional upside to our forecast. Our price estimate is over 10% ahead of the current market price.

In an attempt to put some numbers on the potential impact of this deal, here’s how we break down Groupon’s contribution:

• Groupon’s subscriber base increased from 600k in 2009 to almost 40 million by Dec 2010. We expect its staggering growth rate to continue from over 60 million in 2011 to over 200 million mark by the end of our forecast period.
• If 1 in every 20 subscribers (5%) bought travel coupons on Groupon, even once a year, it would translate to incremental bookings for Expedia of around 1.5 million more bookings in the second half of 2011 rising to around 10 million additional bookings by the end of our forecast period.
• To get this estimate, we forecast that on average 2 people stay per hotel room and for 2 nights per stay leading to an additional 1.5 million (1.5 million bookings/2 per room x 2 nights per stay) hotel night bookings in 2011 rising to about 10 million (10 million bookings/2 per room x 2 nights per stay) hotel night bookings in the coming years.
• However bookings through Groupon will come at a discounted price (~50% of the Average Daily Rate for hotel night stay). Hence, 2 hotel night bookings through Groupon shall otherwise be equivalent to 1 hotel night booking at Expedia’s website.

The net impact is around 750k additional hotel night stays in Q2 2011, which could grow to almost 5 million additional hotel night stays booked by the end of our forecast period. This would increase our market share estimates to almost 2.5% implying about 2% potential upside to our current $30.60 Trefis price estimate of Expedia’s stock.

If however, Groupon had a greater impact on Expedia and its market share rose to around 3% by the end of our forecast period, this would imply around just over 10% additional upside to our price estimate and a combined potential upside of around 25% to the market price.

You can drag the graph below to see the impact on Expedia’s stock price estimate.

View our detailed analysis for Expedia and Groupon here.