A Recap Of Expedia In 2013: Stock Steady After A Rough Patch

With over $1 billion in Q1 2013 revenues (a 24% year-over-year increase), leading online travel agency Expedia (NASDAQ:EXPE) made a promising start to the year 2013. The company registered robust growth (28% year over year) in hotel room nights booked in that quarter, on account of rapid international expansion. Barring Hotwire, which faced some challenges, all of Expedia’s brands grew at a healthy rate despite macro headwinds. (Read: Hotel Bookings Continue To Spur Expedia’s Growth)

Investors received Expedia’s Q1 numbers as a sign of strong growth momentum. However, they turned less optimistic when the company posted Q2 results (on July 25) that were below expectations. Room nights growth and revenue growth in Q2 decelerated to 19% and 16% year over year respectively. The company’s profitability was also hurt as adjusted EBITDA declined 14% year over year. The downbeat Q2 results suggested that Expedia’s growth rate could decelerate further in the coming quarters. Expedia’s stock was trading above $55 since the start of the year till its Q2 earnings announcement. The stock price slumped by more than 20% post the Q2 results, marking the largest decline for the stock in a single trading session of 2013.

Investors gained back their confidence in the company within one more quarter. The stock bounced back post the Q3 earnings announcement (on October 30) which signaled that the outlook was still intact. The stock has been steadily rising since then and is currently trading near $69. We have a price estimate of $65 for Expedia’s stock, about 5% lower than the market price.

Slow Traffic Growth Led To The Deceleration In Room Nights Growth and Revenue Growth In Q2

Increased competitive activity in the off-line (TV advertisements) brand marketing channel from Booking.com and TripAdvisor led to weaker growth in direct type-in traffic at Expedia in Q2. This means that users made fewer searches for Expedia on the Internet. Direct type-in traffic is the most efficient traffic for customer loyalty and profitability according to the company’s management. Other sources of traffic include advertisements placed on the web that direct users to Expedia’s site when they click on the ad.

TripAdvisor’s transition to meta-display also took a toll on the traffic. TripAdvisor is an important source of traffic for online travel agencies (OTAs), who advertise on TripAdvisor affiliated websites to attract users. Earlier, advertisements on TripAdvisor appeared in pop-up windows every time a user clicked on show prices. Now, all the comparison based shopping including prices and availability take place on TripAdvisor’s website itself, sending fewer leads to advertisers. Expedia held up on its advertising spend on TripAdvisor in Q2 as it was wary of the new meta-search platform. Consequently the company lost considerable traffic.

Slower traffic growth due to the previously described reasons led to the deceleration in room nights growth at Expedia which in turn led to the deceleration in revenue growth. For further insight into Expedia’s Q2 earnings results, please read our article Expedia’s Stock Shows Warning Signs As Competition Sinks Results.

What revived the stock in Q3?

After closely observing TripAdvisor’s meta-search platform in Q2, Expedia ramped up bidding activity on the platform in Q3. This helped the company to bring more traffic to its websites, and thus, to sell 20% year over year more rooms in the quarter despite rising competition. Increasing adoption of Expedia’s Traveler Preference Program (ETP), which allows travelers to choose between paying the hotel before the stay and paying the hotel post the stay, also helped the company to keep the growth rate from falling further. As compared to a decrease in Q1 adjusted EBITDA increased 16% year over year in Q2. Expedia’s stock rose by more than 15% to $59 post the Q3 results. For Expedia’s Q3 performance read: Expedia Rides Higher As Market Forces Turn In Favor.

What’s The Outlook For Q4 and 2014?

We believe that Expedia is well positioned to leverage future growth in the online travel industry. In our view, travelers will adopt the ETP program at a rapid pace in 2014 as the program is rolled out globally. This will help the company to continue selling more rooms every quarter. Additionally, the company has forged many partnerships, such as the marketing agreement signed with Travelocity in 2013, that will create an additional distribution channel for Expedia in the U.S. (Read: Expedia Is Better Positioned for Growth After The Travelocity Deal)

Driven by such collaborations and the success of ETP, we estimate that Expedia’s market share of global hotel bookings will continue rising in the future. However, rising competition from Priceline (NASDAQ:PCLN) could be a threat. Priceline overtook Expedia as the world’s largest online travel agency by sales in 2010. It is strongest in Europe, where its Booking.com brand has over 45% share of OTA gross bookings.

After building a strong foothold in Europe, Priceline is now pursuing aggressive expansion in the U.S. Priceline launched its first offline advertising campaign for Booking.com in the U.S. this year. It also completed the acquisition of Kayak, the market leader in U.S. meta-search market. Expedia receives the majority of its revenue from the U.S. With over 40% share of U.S.  OTA gross bookings, Expedia is the biggest online travel agency in the country. We believe that Priceline’s efforts to penetrate the U.S. travel industry could hurt Expedia’s market share. (Read: Priceline Plans To Pare Expedia’s Lead In U.S. Online Bookings)

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