An increasingly saturated online travel market in the U.S., increasing growth opportunities in Europe and Asia-Pacific regions, and the proliferation of mobile devices are some of the key trends impacting the global online travel market. The emergence of alternate platforms – such as smartphones and tablets – have registered significant growth, which is expected to continue at a rapid pace in the years ahead. Targeting the growing opportunities in the mobile travel space, Expedia (NASDAQ:EXPE) added yet another dimension to its growth strategy last year by launching a number of applications for the iPhone, iPad and Android devices.
In a recent study by Expedia to gauge the mobile device habits of travelers in the U.S., it found that close to 61% of online adults in the U.S. own and use a smartphone, e-reader or tablet device, and around 70% of users booking hotels via Expedia’s mobile application look for travel within a 24-hour time period.
Thus, to better service its mobile users, Expedia launched a new update and an exclusive feature for its hotel mobile application. The company will now offer discounts ranging from 10% to 30%, at more than 2,000 hotels in the U.S., Canada and Europe, off hotel desktop rates on its mobile application. 
Measured by gross bookings, U.S.-based Expedia is the largest online travel company in the world. However, Priceline (NASDAQ:PCLN) has been growing at a robust rate over the past few years, and it recently managed to close Expedia’s lead over it in terms of OTA market share in the U.S. to only 2.6%. While Expedia accounts for 14.2% of the U.S. OTA market, Priceline has a market share of 11.6%. 
We estimate hotel bookings to constitute close to 66% of Expedia’s valuation. Not only does this segment contribute over 70% to the company’s revenue; but, with close to 23% revenue margins, it is also the most profitable. Expedia received ~4% traffic through mobile bookings in 2011 and, with increasing mobile penetration globally, we expect this fraction to increase supported by exponential growth in the smartphone using population. So, we believe the company’s focus to introduce innovative offerings to tap potential growth in these two segments will fare well for its valuation.
If online travel agencies fail to keep up with innovation in this space, they face the risk of losing out a growing user base of online travel bookings via mobile devices. However, with the launch of mobile exclusive deals and its recent deal with Fotopedia, we think that Expedia is doing well to increase the potential traffic from this segment. (Read: Expedia Taps Fotopedia’s Growing User Base By Lending Its Hotel Booking Apps)
Our price estimate of $61.62 for Expedia is at a premium of close to 20% to the current market price.Notes:
- On the Go: Expedia Launches Exclusive Mobile Deals, Reveals Summer Travelers’ Mobile Habits, Yahoo Finance, August 30, 2012 [↩]
- Priceline claws back ground from Expedia-Top US travel sites, July 2012, Tnooz, August, 6 2012 [↩]