While Expedia Delivered A Lukewarm Quarter, Its New CEO Plans To Steer The Company To Better Days Through A Focus On Organic Growth
It took Expedia (NASDAQ: EXPE) a new CEO and a lukewarm third quarter to finally come to the conclusion that focusing on organic growth might be the best way to pursue the top position in the online travel market. Expedia was on an acquisition spree over 2014 and 2015. The company even managed to consolidate the U.S. online travel market through its acquisitions and currently enjoys an over 70% share of the market. However, even that didn’t guarantee Expedia steady growth. Not only was it facing integration related problems (for its newer acquisitions) and a pressure in its bottom line due to high expenses related to its deals, but the OTA leader, Priceline, even managed to capture a portion of Expedia’s share of the market through its dogged pursuit of organic growth. This is not to say that Priceline doesn’t undertake acquisition or pay dearly for it, sometimes. Priceline, too, paid a $941 million impairment charge for its online restaurant booking platform, OpenTable, that it bought in 2014 for $2.6 billion. However, Priceline’s acquisition strategy is still much more measured than that of Expedia’s and that might be a reason why the global OTA leader keeps soaring with its main focus being organic growth. We have a $142 price estimate for Expedia’s stock, which is around 17% higher than the current market price.
For the third quarter, Expedia’s revenues at $2.96 billion (15% y-o-y growth) came in below market expectations. Its profits grew by ~25% to $349.3 million. Room night growth for the company including its HomeAway platform stood at 16% compared to a 31% growth in Q3 2016. Its results were mainly dampened by a loss to the tune of $8 million and an excessive spending on its metasearch arm, Trivago, and its vacation rental platform, HomeAway, and around $15 million to $20 million of its profits were eroded due to the natural calamities like hurricanes and earthquakes. Expedia’s platforms currently include around 500,000 accommodation properties including hotels and vacation rentals, thus reflecting a 57% y-o-y growth.
Expedia’s New CEO Promises To Focus On Organic Growth
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Its new CEO Mark Okerstrom said that though the company will still be interested in strategically important acquisition targets, however, its main aim will be to grow organically through the in-house brands including Hotels.com, Expedia, and HomeAway. The new CEO aims to make the company locally relevant on a global scale rather than going global, which was its former CEO Dara Khosrowshahi’s vision. This strategy will entail that the company looks into the offerings it provides in a certain region and improves upon it, such as growing its local lodging supply, improving the translation of languages, and investing more into the technological and marketing segments in a local market. The new Expedia Chief wants to see the company as the number one online travel agency in the world and perhaps, he has understood with experience, how focusing on individual markets is more important than growing a portfolio of companies across markets. The company has also decided to focus more on the technology and customer service aspect of its platforms and invest aggressively to enhance these areas.
Both HomeAway And Trivago Faltered
Expedia’s acquisition, HomeAway, the largest vacation rental platform in the world, was expected earlier to reach a $350 million profit target by 2018. However, the management doesn’t think that might be an achievable dream anymore. The marketing spend on the platform, predominantly to make more of its offerings available on the online platform, seems to have impacted the profits. The platform will presently focus on marketing and getting the most returns from its 1.5 million bookable properties.
Trivago (Expedia’s metasearch arm where it has a majority stake) has so far been one of the fastest growing metasearch platforms. After going public last year, in Q1 2017, Trivago registered a 62% Y-o-Y growth in its revenues to $286 million while its EBITDA soared by a whopping 169% to $21 million. In Q2, Trivago’s revenues grew by 64% to $328 million. It exceeded $1 billion in revenue in the trailing 12 months for the first time in its history. However, Trivago’s growth seems to have slowed down in Q3 with a deceleration of its revenue growth to 22% y-o-y. This was mainly due to its marketing efforts, advertisers’ changing demands, and a decline in monetization. However, the management expects the brand to bounce back soon though the first half of 2018 is expected to remain weak.
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