Expedia's Investments Behind Its Platform Should Support an Ongoing Network Effect

Senior Equity Analyst

Dan Wasiolek

Revenue segments as reported by the company.

Expedia Group (excluding trivago)

Trivago

Intercompany eliminations

trivago (third-party revenue)

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Expedia's investments in a unified technology platform and loyalty stand to support its network advantage, the source of its narrow moat. We think worker flexibility will increase long-term travel demand. We developed this positive stance because higher-income occupations (like those in technology, finance, legal, and architecture) are in industries that are the most likely to support ongoing work from remote locations.

Expedia has built a leading network of online travel services, which has driven a strong user base. We expect this network effect to remain over the next decade, although supplier consolidation creates some headwinds in U.S. markets. In addition, replicating Booking's leading network in Europe, while not an insurmountable hurdle, will involve marketing and labor investments over the coming years. However, Expedia's investments to further expand its international presence should support its network advantage over time. Also, in emerging markets, the company has a collaboration with Trip.com, the leading online travel agency in China. Finally, the company's Vrbo brand gives Expedia a leading share in the fast-growing online vacation rental market.

During 2020-21, Expedia achieved the removal of $700 million-$750 million in annualized run-rate fixed costs. Also, Expedia has taken out $200 million in variable costs. We expect the company to reinvest some of these cost savings in building its network through brand marketing, loyalty and user experience enhancements over the next few years. We see its powerful network advantage driving higher direct traffic (which have no marketing costs), allowing the company to offset pressure from indirect channels like Google (which add to marketing costs).

Another risk is focused entry from Google, Meta, Amazon, Alibaba, Costco, and others could double the current handful of players with dominant scale, leading to a meaningful impact on profitability.

Business Strategy & Outlook

We don't think Expedia's narrow moat, which is driven by a durable network effect in the online travel industry, has been materially altered by COVID-19. Over the past two decades, Expedia has built a strong network of properties (supply side of the network effect equation), which has driven strong end-user traffic and bookings (demand side of the network effect equation). At year-end 2022, the Expedia's global platform had 3 million properties, made up of over 2 million alternative accommodation listings and 900,000 hotel units. On the demand side, as measured by App Annie on May 3, 2023, Expedia's core platform ranks as a top-10 travel iOS mobile application in 28 countries versus 153 for narrow-moat Booking.com, 93 for narrow-moat Airbnb, and two for narrow-moat TripAdvisor.

As a result of the strong network effect, Expedia and Booking combined control the majority of the global online travel agency booking market. Beneath these two, share is highly fragmented, making it extremely challenging for smaller new entrants to gain customer traffic and supplier scale. Smaller new entrants would need substantial human capital to build relationships with hotels and gather crucial information/pictures from those hotel properties. They would also need to spend heavily on advertising to attract customers to the website, and any customers obtained would require IT, data center, and 24/7 customer support to retain. Expedia is able to advertise well in excess of competitors, which helps drive its network advantage. In 2022 Expedia spent $5.4 billion on direct marketing (47% of total revenue), while Booking spent an estimated $6 billion in 2022 (36% of total revenue); in comparison, number-three player Orbitz spent $334 million on advertising in 2014 before it was acquired by Expedia in 2015. As scale is built, understanding of consumer behavior also increases, which leads to improved customer experience and conversion.

Our narrow moat rating is further justified by the company's return on invested capital and market share gains. We project ROIC including goodwill to average 12% over the next five years (2023-27).

Despite Expedia's high ROICs, we don't believe the company has carved a wide moat, given potentially meaningful competition beyond the next 10 years from new entrants that already have the customer traffic and budgets to build network scale, including wide-moat Google, wide-moat Meta, wide-moat Amazon, narrow-moat TripAdvisor, wide-moat Costco, and hotel consortia. Focused entry from these competitors would double the current handful of players that have dominant scale, leading to commodification of the industry and a meaningful impact on margins. That said, we expect the market to support some level of increased competition over the next several years. The travel booking market remains large at $1.9 trillion, and we believe online penetration of the travel market can continue to expand the next 10 years from its current mid-60% level.

Narrow

Economic Moat

Expedia

CheapTickets  is an online travel services company focusing on the leisure market, offering airline tickets, hotel and vacation rentals, rental cars, customized vacation packages, and cruises. CheapTickets was a wholly owned subsidiary of Orbitz Worldwide, Inc., and with Expedia's purchase of Orbitz, is now a subsidiary of Expedia.

CheapTickets

HomeAway  is a vacation rental marketplace with more than 2,000,000 vacation rentals in 190 countries. It operates through 50 websites in 23 languages. The company offers a comprehensive selection of rentals for families and groups to find accommodations such as cabins, condos, castles, villas, barns and farm houses.

HomeAway

Expedia Group is a global travel company. Its websites, which are primarily travel fare aggregators and travel metasearch engines, include Expedia.com, Hotels.com, Hotwire.com, CarRentals.com, trivago, Venere.com, Travelocity, Orbitz, and HomeAway.

Hotwire.com is a travel website that can be used to book airline tickets, hotel rooms, rental cars, and vacation packages. It operates by selling off unsold travel inventory at discounted prices.

Hotwire.com

Hotels.com is a website for booking hotel rooms online and by telephone. The company has 85 websites in 34 languages, and lists over 325,000 hotels in approximately 19,000 locations. Its inventory includes hotels and B&Bs, and some condos and other types of commercial lodging.

Hotels.com

Trivago is a German multinational technology company specializing in internet-related services and products in the hotel, lodging and meta search fields. The American travel company Expedia, Inc. owns a majority of the company's stock. Trivago was the first hotel search engine in Germany. As of 2012, it was one of the fastest growing companies in Germany, with profitability doubling since 2008.

Orbitz is a travel fare aggregator website and travel metasearch engine. The website is owned by Orbitz Worldwide, Inc., a subsidiary of Expedia Inc. It is headquartered in the Citigroup Center, Chicago, Illinois.

Orbitz

Travelocity  is an American Online Travel Agency. The website is owned by Expedia Group.

Travelocity

Expedia Group, Inc. is an online travel company, which engages in the provision of travel products and services to leisure and corporate travelers. It operates through the following segments: Retail, B2B, and Trivago. The Retail segment provides a full range of travel and advertising services to worldwide customers through a variety of consumer brands including: Expedia.com and Hotels.com. The B2B segment offers Expedia business services organization including Expedia Partner Solutions and Egencia. The Trivago segment generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites. The company was founded in 1994 and is headquartered in Seattle, WA.

Earnings data Q2 2023

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