It’s always a dicey game trying to guess what market Amazon.com, Inc. (NASDAQ:AMZN) might move into next. However, there is been some credible discussion lately at Morgan Stanley about the possibility of Amazon moving into online travel. Were this to become the case, the question is whether Amazon should reinvent the wheel or whether it should gobble up competitors Booking Holdings Inc (NASDAQ:BKNG) and Expedia Group Inc (NASDAQ:EXPE).
When you get a look at the valuations involved, however, it becomes very clear very quickly that the buyout option is not viable. BKNG as a valuation of $103 billion, and wouldn’t go out without a significant premium. Expedia is valued at $16.5 billion, and while it wouldn’t fetch as much of a premium, it would still demand one. It also is not nearly as profitable.
AMZN management obviously has significant financial and technological resources at its fingertips. If AMZN stock management wanted to make this happen, it could. I imagine the biggest obstacle would be time.
The question is would airlines, hotels, rental cars and other providers want to be able to do business with Amazon? Are there non-compete clauses for example? Not that I think any of that would matter, because I’m sure Amazon would find financial incentives to work around these issues.
The net income between Expedia and booking holdings alone is nearly $4 billion annually. Neither of these businesses, practically booking holdings, has a tremendous amount of overhead. The former also has tremendous free cash flow.
This is a business Amazon stock owners would love to have a piece of. Not only that, Amazon’s brand name, and the now ubiquitous ability to book online travel, gives it an extraordinary market advantage out of the gate. Whereas existing businesses, including those that have been gobbled up by the two industry gorillas, had to slowly build market share in business over time, Amazon could simply sweep right in and likely instantly take over a large share of the market.
That’s because Amazon’s interfaces have always been very easy to use. There’s no reason to assume that would change. Not only that, it fits nicely into Amazon’s one stop shopping experience, whereas online travel requires individuals to go to specific websites.
However, let’s remember that Amazon has twice before try to move into this space with Amazon local and Amazon Destinations. Both of these were organic attempts and both of them failed. The reason they failed is not because Amazon is so easy to use, but building and maintaining this kind of platform is actually far more difficult than anyone, including AMZN, realized.
That means we have to circle back to the question of an acquisition. A 20% to 30% premium for Expedia would mean an acquisition in the range of $20 billion-$22 billion for Amazon stock management. It is true that revenues did Expedia continue to grow at a robust pace. 2017 operating income was $625 million. Free cash flow was about $1 billion. Expedia has $4.1 billion in cash and investments offset by $3.7 billion in debt.
Amazon stock is backed with $31 billion in cash and $24 billion in debt. It generated $6.4 billion of free cash flow last year. So I can’t say that an acquisition is a prohibitive. One would think that the deal could contain a substantial amount of cash, some additional debt and perhaps some Amazon stock, and shareholders would be perfectly happy.
The advantage of buying the existing platform that allows Amazon to integrate anything else it wants into that platform. Imagine as you are in your shopping cart if Amazon suggests all kinds of travel accessories and supplies that you need for your trip. Thus, Amazon would be able to leverage its retail operation further by integrating it into the Expedia platform.
Do I think this is going to happen? I think it’s a realistic possibility. As it is, Expedia makes a lot of money, and is a solid operation. I think you could do worse owning Expedia stock, and whether you hold AMZN stock is not going to make much of a difference whether it chooses to buy Expedia.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].