Google Pressure And Direct Bookings Will Erode Travel Margins

Key Takeaways

• Rising customer acquisition costs and declining commissions are expected to compress margins and constrain Expedia's long-term earnings growth.
  
• Increasing direct bookings with hotels and airlines, along with regulatory scrutiny, could lead to stagnant transaction volumes and higher operating expenses.
  
• Strong international growth, tech investments, loyalty gains, and cost discipline are positioning Expedia for market share gains, margin expansion, and diversified long-term earnings.

Catalysts

Operates as an online travel company in the United States and internationally.

• Expedia faces mounting pressure from the growing influence of Google in the travel industry, as user acquisition is increasingly shifting to paid channels. This shift is expected to significantly raise customer acquisition costs, resulting in erosion of net margins and further reducing return on advertising spend.
  
• The persistent trend of consumers booking directly with hotels and airlines, motivated by robust loyalty programs and streamlined mobile experiences, is expected to lead to declining take rates and downward pressure on revenue growth. As this direct booking momentum accelerates, Expedia's core transaction volumes could stagnate or even contract.
  
• Heavy reliance on performance marketing exposes Expedia to potential volatility from changes in external platform algorithms, particularly in paid search and social. Rising marketing expenses without a corresponding sustained increase in direct traffic or brand loyalty will likely compress EBITDA and net margins in the coming years.
  
• Hotel chains and airlines are gaining bargaining power and increasingly lowering commissions paid to online travel agencies such as Expedia. This shift in industry dynamics is anticipated to drive structurally lower take rates and persistent margin pressure, constraining long-term earnings growth.
  
• Heightened regulatory scrutiny over data privacy and digital marketplaces will drive up compliance costs, limit the ability to personalize user experiences, and reduce conversion rates. These regulatory headwinds are set to inflate operating expenses and place further strain on Expedia's profitability over the long term.

Expedia Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Expedia Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Expedia Group's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.9% today to 10.5% in 3 years time.
• The bearish analysts expect earnings to reach $1.7 billion (and earnings per share of $15.5) by about August 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, down from 22.3x today. This future PE is lower than the current PE for the US Hospitality industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

Expedia Group Future Earnings Per Share Growth

Risks

• Expedia is experiencing robust international growth, especially in Asia and EMEA, with B2B bookings up 17 percent and room nights in Asia growing nearly 20 percent, which mitigates softness in the U.S. market and could drive long-term revenue growth and earnings diversification.
  
• Ongoing investments in AI and technology are delivering higher conversion rates and efficiency gains, such as reduced customer service costs and improved developer productivity, which are already expanding net margins and can be expected to continue driving margin improvement over time.
  
• The company's loyalty program, One Key, is growing active high-tier members at high single-digit rates, with increased retention and repeat bookings, creating a sustainable customer base and improving revenue per user and lifetime value.
  
• Brand Expedia is taking share in multiple markets and is seeing its fastest growth ever in attach rates for multi-item bookings, while improvements at Hotels.com and Vrbo relaunches are showing measurable progress, indicating that brand strength and product innovation could positively impact market share and top-line revenue.
  
• Discipline in cost management, such as operating efficiencies, lower overhead, and restructured marketing, has already resulted in about 1.5 percentage points of adjusted EBITDA margin expansion this year, with further cost leverage expected in the second half-this could lead to earnings and margin outperformance versus peers over the long term.

Valuation

• The assumed bearish price target for Expedia Group is $168.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Expedia Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $168.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $16.4 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $195.26, the bearish analyst price target of $168.0 is 16.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.