• Expedia has displayed a healthy growth in top line while its margins have remained volatile.
• Acceleration in US hotel room demand and increase in revenue per available room during Q3 2014 will serve as a material tailwind for the company during the quarter.
• Competition from Priceline.com and slowdown in global economic growth will act as a headwind for the company.
Expedia Inc. (NASDAQ:EXPE) is slated to report 3Q 2014 earnings after the market close on Thursday, October 30th. Expedia performed well during the first half of the year with revenues reaching $2.695 billion, a 22% yearly growth. Expedia’s stock is up more than 15% on Year to date basis considerably outperforming NASDAQ and S&P 500. Traditionally Expedia has delivered a robust revenue growth but its margins have been volatile.
Expedia continues to be dominant player in the US online travel market. Its partnership with Travelocity, which allows Expedia to provide content, inventory and customer service and technology for Travelocity’s U.S. and Canadian websites, will lead to an increase in revenues. Travelocity contributed 4% to global room night growth in Q2, 2014. In air tickets segment where Expedia registered 28% YoY growth, the partnership with Travelocity contributed 18%.
US hotel room demand has accelerated in Q3 according to a report by TravelDailyNews.com. There was also 9.2% increase in revenue per available room, the highest YoY growth in the last eight years. The increase was due to improvement in occupancy rates and room rates. This is good news for Expedia as it derives majority of its revenue from hotel room bookings.
Competition from Priceline
Expedia continues to experience heavy competitive pressure from Priceline.com mainly through its subsidiary Booking.com. Priceline has also partnered with NYC & Co to aid bookings on New York City’s official tourism website. Priceline’s acquisition of meta-search engine, Kayak, which has 50% of US market share, will help it build a strong mobile platform. According to report in Forbes Around 38% of leisure travelers and 57% of business travelers in the U.S. use mobile to get travel information. Priceline’s market share in US has increased from 11% in 2012 to 16% in 2013.
Slowing Economic Growth
Slowing global economic growth may also put pressure on Expedia’s growth. Global growth projections for 2014 and 2015 were revised downward by IMF. Since tourism and traveling industry have high elasticity of demand, decline in economic growth impacts the industry pretty hard. Online travel agencies may also face a threat from suppliers own websites. According to PhoCusWright’s U.S. Online Travel Overview, 13th Edition supplier companies’ websites are increasing their dominance over OTA’s in almost every segment. While in 2012 suppliers websites accounted for 64% of total bookings, in 2015 they are likely to account for 66% of total bookings.
Analyst estimate an EPS of $1.74 on a revenue of $1.68 billion. Expedia has delivered an earnings surprise in last four quarters.
Source: Yahoo Finance
Analysts’ estimate of EPS is 21.67% more than EPS delivered by the company in same quarter last year. Revenue estimate of $1.68 billion is 16.167% higher than $1.4 billion generated by company in same quarter last year.
Expedia shares trade at 33.2x trailing earnings, above the 5-year average of 25.0x and Priceline’s 28.9x. Expedia’s PE ratio is supported by the growth in its revenue and EPS. Expedia's partnership with Travelocity and strong demand for hotel rooms in US during Q3 will help Expedia to maintain its growth momentum in Q3 2014. However earnings volatility remains a cause of concern.