Fueled by robust growth in its hotel booking business, online travel agency Expedia (NASDAQ:EXPE) posted a 13% increase in gross bookings and a 14% increase in revenues last quarter. The company is set to announce its Q3 2012 earnings Thursday, October 25. Like many other online travel agencies, Expedia’s top-line faces pressures from the tough macroeconomic conditions and a volatile exchange rate. However, we believe the company could post another quarter of strong earnings. The increasing number of partnerships in Asia and Europe, an increase in hotel bookings, and a focus on tapping potential growth in mobile traffic are some of the key trends that will help fuel Expedia’s growth in the current quarter and beyond.
Increasing Presence in International Markets
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Expedia is the biggest US online travel agency in terms of gross bookings, and the company has been focused on expanding its leadership position in international markets as well. Expedia’s revenue contribution from international markets has nearly doubled in the past five years, from 24% in 2007 to around 42% at present.
The fragmented European hotel market and rising per capita income in emerging economies provide tremendous growth opportunities for travel agencies. Additionally, Internet penetration in these economies is relatively low but is expected to grow at a rapid pace, which leaves immense potential for growth for the online travel industry as a whole.
The acquisition of VIA travel by Egencia, the Air-Asia Expedia joint venture, rising popularity of hotel.com, the collaboration with Fotopedia Paris & Fotopedia Japan, and the eLong partnership to expand presence in China are a few examples that reiterate our belief of the company’s potential to successfully leverage opportunities in international markets.
Growth in Expedia’s Hotel Business
We estimate hotel bookings to contribute close to 65% to Expedia’s valuation, making it the most important division in the company’s portfolio. Apart from a majority contribution to Expedia’s revenue, hotel bookings is also the most profitable business (>20% revenue margins) compared to air tickets, car rentals and cruises.
Despite economic weakness, the company saw a 22% increase in global room night bookings last quarter, which we believe is reminiscent of Expedia’s continuing strength in the hotel business. However, while we estimate Expedia to continue posting rapid growth in hotel gross bookings, we think the intense competition among OTAs will put a downward pressure on revenue margins.
Potential Increase in Mobile Traffic
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 mobile travel space, Expedia added yet another dimension to its growth strategy last year by launching a number of applications for iPhone and Android users.
Aiming to tap into the rapidly growing user base of online travel bookings via mobile devices, Expedia launched a new update and an exclusive feature for its hotel mobile application last month. The company now offers 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. (Read: Expedia Taps The Mobile Travel Space With Exclusive Deals)
Expedia received ~4% traffic through mobile bookings in 2011, and we believe that with the introduction of Exclusive deals the figure could increase this year. The company’s focus on introducing innovative offerings to tap potential growth in this segment fares well for its valuation.
We will update our price estimate of $61.62 for Expedia post the Q3 2012 earnings release.