Expedia (EXPE US) - Fasten your seatbelts
Expedia was originally founded by Microsoft in 1996 and then later spun off and acquired by IAC in 2001. In 2005 Expedia was spun off again. The stand-alone business then spun off travel research site, Tripadvisor, in 2011 and separately listed Trivago on the Nasdaq exchange in 2016. Expedia continues to hold a 64% stake in Trivago. Alongside the main Expedia platform, the group owns and operates Hotels.com, Vrbo, HomeAway, Orbitz, Travelocity, Hotwire, Wotif, ebookers, CheapTickets and CarRentals.com.
Following a significant impact from Covid-19, Expedia grew revenue by 36% in FY22, which was split relatively evenly across the company's business areas. Most of the company's revenue is generated from accommodation (77% in 4Q22), with smaller contributions from advertising and air travel.
Competition - Booking Holdings
Operating model
Historically, the key difference between Expedia and Booking Holdings, whose brands include Booking.com, Priceline.com, Agoda.com, Kayak.com, Cheapflights, Rentalcars.com, Momondo, and OpenTable, was its chosen operating model and geographic focus. Booking predominantly used an agency model focussing on the European market, while Expedia mainly made use of the merchant model in the United States.
In an agency model, the client pays the final price to the hotel (either at the time of the booking or at the check in). The hotel then pays the agreed commission to the online travel agency (Expedia or Booking) at month end. In a merchant model, the client pays the full final price to the online travel agency (and not to the hotel).
Over the last few years, both companies have, however, begun to make use of both operating models. Expedia vendors are now able to dictate the payment method (up front via Expedia, directly at the hotel, or a choice between the two).
Another common discussion point is the high levels of advertising spend required by both firms. Expedia's advertising spend per room night is ~$18, far higher than the $7 spent by Booking, and $1 by Airbnb. However, we view this as a misleading statistic considering that revenue is far closer between the two companies than the number of room bookings, meaning that Expedia typically sells rooms at higher price points.
Still, selling and marketing expenses represent approximately 52% of Expedia's revenue compared to just 35% for Booking. How far Expedia could cut these expenses without having a large impact on revenue is unclear, but it is regarded as a potential level to improve margins. The company is also in the process of launching a new combined loyalty program, "One loyalty", to aid user retention.
Take rates
Expedia's take rates (transaction fees) have remained relatively steady over the past four years. The company achieves significantly higher take rates from its merchant business (15%) than from the agency segment (7%). Meanwhile, Booking is achieving 13% from both operating models. We consider this to be mainly due to the underlying business exposures (i.e., a greater proportion of accommodation bookings) rather than a difference in the brands market value.
In this oligopolistic market dynamic, we do not expect any change in industry take rates. We have, however, calculated that if Vrbo (still being monetised) were to match Airbnb take rates then Expedia's revenue would increase by ~15%.
Financial considerations
Investment case summary
Risks
Consensus and Valuation
