Should I Buy Expedia? 3 Pros, 3 Cons

by Tom Taulli | October 29, 2012 7:00 am

[1]Expedia’s (NASDAQ:EXPE[2]) shares took flight Friday, up about 12% to $57.38, after releasing its third-quarter report Thursday evening. Adjusted earnings came to $1.32 per share, and revenues rose by 17% to $1.2 billion. The Wall Street consensus was for $1.26 per share and revenues of $1.17 billion. Expedia showed strength in Asia and even Europe — especially with hotel bookings

Actually, for 2012 the company’s stock price is up nearly 100%.

However, might there be some risks for investors? Perhaps we may see a pullback? Let’s take a look at the pros and cons:

Pros

Strong platform. Expedia operates Expedia.com, Hotels.com, Hotwire.com, Classic Vacations, CruiseShipCenters and Egencia. The company has a footprint in over 22 countries.

Besides bookings for hotels and airlines, Expedia also has options for vacation packages, cruises and car rentals.

Innovation. Expedia continues to invest heavily in new technologies. For example, its Hotwire iPhone app is getting lots of traction. About 20% of bookings come from mobile sources.

But Expedia has also been rethinking its business models. To this end, it has launched its Traveler’s Preference platform. It allows consumers to either pay in advance or at the hotel while on their stay. It’s a smart way to help boost conversions.

China. The country has been a big source of growth. Keep in mind that Expedia has a relationship with eLong (NASDAQ:LONG[3]), a Chinese online travel service provider that has been critical for gaining distribution.

And the market opportunity is massive. Annual travel revenues are about $100 billion in China and only about 13% is booked online.

Cons

Competition. There are a variety of mega players that Expedia must fight, like Priceline (NASDAQ:PCLN[4]), Travelocity and Orbitz Worldwide (NYSE:OWW[5]). Expedia also must compete against innovative startups, such as Hipmunk.

Global Economy. It’s slowing down. In fact, even Berkshire Hathaway’s (NYSE:BRK.A[6], NYSE:BRK.B[7]) Warren Buffett has recently noted this[8].

So far, the headwinds have had little impact on Expedia. But if the U.S. does go over the “fiscal cliff” or China does have a hard landing, the company’s growth could stall. After all, travel expenses are easy to cut back.

Google Threat. The search giant is getting more serious about the travel market. To this end, Google (NASDAQ:GOOG[9]) purchased ITA Software, the largest provider of travel search data. Google also has launched its own online travel platform.

Keep in mind that Expedia also gets a large amount of its traffic from Google’s search queries and even mobile devices.

Verdict

It seems likely that the momentum will continue for Expedia. The company will likely find growth in China and even Europe. It will also benefit from its mobile efforts and new business models. It helps as well that Expedia has been more focused, as seen with the spin-off of TripAdvisor (NASDAQ:TRIP[10]).

While the stock price rise has been torrid this year, the valuation is still reasonable. Consider that the forward price-to-earnings ratio is 16x.

So in light of all these factors, the pros outweigh the cons on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[11], a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.[12]” Follow him on Twitter at @ttaulli[13]. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/10/should-i-buy-expedia-3-pros-3-cons/

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