Competition from OTAs & Hotels May Erode Expedia's Revenue Margin on Hotel Bookings

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Expedia's ( EXPE ) revenue margin on hotel bookings (calculated as a percentage of total hotel bookings) made through its various websites (Expedia.com, Hotels.com, Hotwire.com) increased from 23% in 2007 to above 25% in 2009 due to declining consumer demand in the 2008-2009 recessionary period, forcing hotels to offer higher discounts to online travel agents (OTA) to attract bookings. Expedia competes with other online travel agents like Priceline ( PCLN ), Orbitz ( OWW ) and Travelocity as well as hotel chains that offer their own online booking services.

Hotel bookings constitute more than 55% of Expedia's stock value by our estimates, and hence the company's value is sensitive to revenue margins from this business segment. Going forward, we anticipate Expedia's revenue margin from hotel bookings to decline gradually to 22.5% due to mounting competition from online travel agents and large hotel chains offering their own online services. Trefis members, however, project margin improvement towards 25%, implying upside of 8% to our price estimate for EXPE stock.

We currently maintain a $38.57 price estimate for Expedia's stock , well ahead of market price.

Increasing Competition from Large Hotel Chains

As the travel industry is increasingly moving towards online reservations, large hotel chains are offering their own online services for travel bookings. The intent behind the move is to eliminate the middle man, the travel agents, thereby earning higher margins and gaining greater control over pricing. By using their own websites for bookings, hotels can run loyalty programs which not only promote repeated guest visits but also enable hotels to cross-sell additional value-added services, thereby earning higher revenue per guest.

… As Well As Online Travel Agents

Hotel bookings offer the highest revenue margin to online travel agencies (OTAs) at close to 25% compared to less than 4% for air ticket bookings and less than 10% for car rentals and cruise bookings. Hence OTAs are focusing on hotel bookings and trying to gain share in this highly profitable niche. With the number of players increasing in this segment, we expect Expedia's revenue margins on hotel bookings to decline gradually.

See our full analysis and $38.57 price estimate for Expedia

Trefis Community Forecast

Trefis community members forecast that revenue margins earned on hotel bookings will increase from 24% in 2010 to 25% by the end of our forecast period, compared to the baseline Trefis estimate of a decrease to 22.5% during the same period. The member estimates imply an upside of 8% to our $38.57 price estimate for Expedia stock.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EXPE , OWW , PCLN

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