Expedia (“Narrow Moat”) World’s largest online travel by bookings offering accommodation services (75% of total sales in 2021), airfare (3%), rentals, cruises, destination and other (15%) and advertising revenue agency. (7%).
Expedia operates a number of branded travel booking sites, including Expedia.com, Hotels.com, Travelocity, Orbitz, Wotif, AirAsia and Vrbo.
With the acquisition of Trivago, the business also expanded into travel media.
Transaction fees for online orders make up the bulk of sales and profits.
Increased user engagement
We expect demand pressures related to COVID-19 to be short-lived, and Expedia’s investments in loyalty, user experience and cost-cutting initiatives to alternative accommodations should support its network advantage, a key source of its competitive edge.
In addition, we expect the introduction of a hybrid work organization to increase the demand for long-term travel.
We have developed this positive position because high-paying professions (such as technology, finance, law, and architecture) are in industries that are most likely to support home-based work.
Investments in Europe
Expedia has built a leading network of online travel services that has built a strong user base.
While vendor consolidation has created headwinds in the US market, we expect this network effect to continue over the next decade.
Moreover, replicating the first Reservation network in Europe, while not an insurmountable obstacle, will attract investment in marketing and workforce over the next few years.
However, Expedia’s investments to further expand its international presence must maintain its network advantage over time.
There is cooperation with the company in developing markets Trip.comChina’s leading online travel agency.
Finally, the company’s Vrbo brand gives Expedia a leading market share in the growing online vacation rental market.
During 2020-21, Expedia managed to eliminate between $700 million and $750 million in annual fixed costs.
Additionally, Expedia eliminated $200 million in variable costs.
We expect the company to reinvest some of these savings over the next few years to build its network through brand marketing, loyalty and improved user experience.
We see its strong network advantage driving higher direct traffic (without marketing costs), which allows the company to offset pressure from indirect channels like Google (which increases marketing costs).
Another risk is targeted access from Google/Alphabet (“Wide Ditch”), Meta-platforms (“Wide Moat”), Alibaba, Amazon (“Wide moat”) and others can double the number of dominant scale players, which will have a significant impact on profitability.
Fair value has not changed
After reviewing Expedia’s third quarter results, we maintained our fair value of $175 per share.
Our fair value estimate assumes an enterprise value of 9 times Adjusted EBITDA.
While global travel has gradually improved since mid-April 2020, COVID-19 has had a significant impact on demand in 2020 and 2021.
As a result, Expedia bookings fell 66% in 2020 to 67% of 2019 levels in 2021.
However, we expect a full recovery of bookings for Expedia by the end of 2023.
Increase marketing spend
Over the next five years, we expect total marketing spend to average 50.1% of total revenue, up from 49.1% in 2021, as efficiency improvements are matched by continued investments to build a more complete network.
We expect Expedia to save costs by effectively focusing on investing in brands that resonate in specific geographies, compared to its previous strategy of investing in all brands in each region.
We expect Expedia to invest in improving the user experience and loyalty driving its savings in international and alternative accommodation, as well as direct traffic and network.
Between 2022 and 2026, we see online alternative accommodation industry bookings grow by more than 20% on average, fueled by an increase in leisure (business/leisure) travel as a result of a slightly sustained increase in full-time and hybrid telecommuting in the country. United States of America.
Over the next five years, we see Expedia’s online vacation rental share approaching 15%.
We expect Expedia’s booking growth to average 10% over 2022-31 (helped by a strong recovery in 2022).
Despite compliance costs related to regulatory changes in the alternative lodging industry, we expect Expedia to enjoy long-term network advantage with operating margins reaching 12.7% in 2031, compared to 7.5% in 2019 before the pandemic.
Our operating margin expansion estimate is based on savings in fixed costs ($700 million to $750 million) and variable costs ($200 million), a portion of which is expected to be reinvested in our network.
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