Expedia (NASDQ:EXPE)

These were my unpublished thoughts pre-spin off of Expedia during 4Q 2011. I chose not to participate due to the fact that both businesses were neither cheap nor are they fantastic, coupled with poor overall climate.

Looking back with hindsight, at then level of $25.02, after the firm did a one-for-two reverse stock split, i.e  2 expedia pre-split to 1 trip advisors and 1 expedia post-split which is now at $35.95 and 31.53 respectively. Returns will be 34.9%.

I was also contemplating a long Expedia and short Priceline but thankfully Priceline though pricey, has some strong reasons to defend its valuations a little (at that time). I would have been killed had I shorted Priceline. Why? Take a look here, courtesy of Google Finance. http://www.google.com/finance?q=priceline

(All amount in US$)

1) Business

• Spun off from Microsoft in a IPO in 1999

• Online travel agency co, stand alone or package, owns Hotel.com, Expedia.com, Seatguru and Hotwire.com

• Competing with Priceline (PCLN), Orbitz (OWW), Ctrip (CTRP), Travelocity, Yahoo travel, Bing travel and Kayak (search only). Notably Orbitz is most often quoted due to availability for price comparisons

• Spinning off worlds largest trip reviews site, Tripadvisors (TRIP) with flagship site and 18 others travel media/ad sites such as AirfareWatchdog, CruiseCritic and FlipKey

• Expedia purchased TRIP in 2004 for $237mm and has 2 classes of equities, A and B

• TRIP has a booking fee estimator (simple no frills system) and combined information of itinery which is greatly appreciated. Furthermore, it also has a good stock of reviews (over 40 million entries) on various locations and hotels which no other competitor has yet and it helps to retain users

• Business model wise, PCLN operates on a auction model with fixed travel times so price discovery and money saving are key. EXPE is more of higher end, more flexibility type of travel booking. 

• PCLN also has no booking fee vs EXPE, however 2009 all dropped booking fees, typically $6.99 to 11.99 hidden in government taxes and fees. However some like OWW still charge for multi carrier itineries

• EXPE also does not have cancel or change fees if performed 48 hours before

• Some may prefer to have no fuss and book a secured quality lodging over an uncertain PCLN even it means a premium or slight discount for EXPE especially for sales tickets

2) Business Segments 

• Hotel bookings - Negotiate deals with hotels, sometimes even buying up inventory to resell at a mark up. So the firm earns a portion of total sum paid for the hotel rooms, not as booking fees

• Airline ticketing - Firm gets unpopular seats from airlines at a discount on these sites and the site can opt to sell at a mark up

• Tie ups with Daodao.com and Kunxun.cn in China and has yet to realize its full potential

3) Financials 

• EXPE is at 274.06M sh * $ 25.02, approx $6.85B mkt cap and around 17x PE 

• TRIP's 35% of revenue and profit is from EXPE

• 2010 EXPE / TRIP 

• Revenues                        $3.35 / 0.486B (or 14.5% of total), growth 13% / 38% 

• Revenue TTM                 $2.80B / 0.401B, growth 9% / 34% 

• EBIT                                 $ 0.83B / 0.26B (or 31% of total), growth  / 33% 

• Unique visitors / month -   73M / 40M

• Registered users -             ? / 20M

• EXPE has grown revenues at 13.24% and FCF by 20.9% p.a over last 5 years

• Estimated 10-15% annual growth for TRIP

• Bulk of EXPE revenue is hotels (60%), airline booking (12%) and cruise/car and destination (10%)

• 15% of bookings are for multi package bookings for same itinery

• Bulk of TRIP revenue is CPC (Cost per click abt 80%), rest CPM (display ads 15%) and others 5% 

• Firm also estimates global online travel ad/media to be worth $750B 

• The firm generates an annual ave $500M fcf TTM, high $600/ low $400 @ crisis, mostly $500mm. At current prices, EXPE is at 11x FCF

• EXPE will lose hedge against ad costs from TRIP, rising ad/op costs also hurt 1Q 2011 bottomline 

• TRIP may introduce new businesses such as direct hotel bookings which is EXPE's main business and carries a higher margin than airplane tickets (CEO Dara Khosrowshahi said spin off will not affect EXPE ability to compete against PCLN)

• EXPE and OWW stopped posting American Airlines (AMR) flight details and impacted earnings. However to note, AMR contributes only 1% to sales and airline booking is only 12% of total revenue. The issue is that AMR tried to have more of the customized flight fees to itself without going through EXPE since it offered a combined hotel and airline package through other sites such as PCLN and 

• Liberty Interactive owns 19.3% of EXPE and may have influence on the management decisions

• New entrants like Gogobot offers a combined package deal with social media (Seeded by Schmidt of Google) 

• Google's purchase of travel data specialist ITA Software will affect the entire online travel space. it is also using search algorithms to favor Google places over other sites and it is noted for 2010, upstream traffic directed to TripAdvisor from Google has declined while same period from Facebook was up 30%. 

• Then spin off will be by 3Q 2011

• The most interesting thing is TRIP makes money regardless of which broker as long as theres ads and affiliate fees when bookings are made on the affiliate sites 

• Tencent bought a 16% stake in Elong (EXPE's china arm) for $84.4M. Tencent is akin to the Google of China with their own facebook and messenger services and 674M active users. It is traded on Hong Kong as 0700 HK. EXPE added 8$ for $41.2M. Both deals done in 2011.

• Elong has a 9% market share versus Ctrip (Nasdaq) with 53.6% in 2010

Comps

• PCLN trades at 52x PE and gained 150% since 2009 (now trading at $26B mkt cap) while EXPE is below its 2009 price. 

• Travelzoo inc (TZOO) also trades at 64x PE

• Orbitz (OWW) is significantly profitable, focuses more on airline segment

• Travelocity (Not listed)

• Kayak (Not listed) - search only and referral 

Sources : Wall Street Journal, Firm websites, various sources