Huge Upside Left for This Travel Stock

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The stock price of Expedia (NASDAQ: EXPE), the world's leading online travel agency, has doubled in the past 12 months. The company posted better than expected financial results throughout 2012. With expanding international presence and a robust hotel business, the stock price is expected to scale new highs in this year too. This article will focus on the company’s long-term growth drivers.

With the worldwide recessionary pressure easing, fundamentals of online travel companies appear the stronger now. Online travel booking looks buoyant because of the shift from offline channels. There has been a proliferation of internet sites over the past decade to help people planning a perfect vacation, and getting it at a discount. I feel Expedia looks most attractive in the lot due to the following three factors:

1. Satisfactory International Expansion

Expedia, the leader in the United States for online travels in terms of gross bookings, is now focusing on expanding its leadership position in international markets as well. Around 60% of the company’s total revenues have been generated domestically in 2012, with the remaining 40% coming from international sources.

The opportunity in the Asia/Pacific region and Europe is significant and is likely to remain one of the strongest drivers of the company’s business over the next few quarters. This is because online penetration in many Asia/Pacific markets remains relatively low and in Europe the worst seems over in terms of economic recession. Expedia has positioned itself perfectly by increasing its hotel inventory and entering into strategic relationships. Hotel booking is the company’s stronghold with a contribution of around 25% of revenue. The company has entered into successful joint ventures with Air Asia, Fotopedia in France and Japan, and eLong in China.

2. Strong Growth in Leisure and Corporate Segment

Expedia’s leisure customers grew approximately 25% in 2012 from the previous year. The Leisure business continues to be driven by hotel revenue, since rising airfares are impacting ticket revenues.

Expedia has beefed up its Egencia operations with the acquisition of VIA Travel, since the company has been gaining ground in its Egencia business that focuses on the corporate segment. Corporate spending on travel continues to pick up, despite the rising airfares that were negative to Expedia’s leisure business. Corporate customers grew approximately 50% from the previous year.

3. Growing Bookings by Mobile Phones

Recognizing the growth of mobile customers, Expedia recently launched an updated mobile app that’s available in the United States on iPhone and Android platforms. The app, which previously featured only hotels, is now packed with information about flight and hotel availability as well as cancellation messaging that users expect to see while booking on Expedia’s desktop site.

Expanding the mobile platform has helped the company penetrating the last-minute bookings business. Around 75% of all mobile bookings are for the same day hotel bookings. Mobile phones are generally used for last-minute bookings. The company is currently working on introducing an air experience on its iOS app, and expects mobile penetration to increase further in the future.

Relative Valuation of Expedia Among Peers

The online travel business is a niche segment with stiff competition. Expedia will continue to face challenges from players like (NASDAQ: PCLN)Orbitz Worldwide (NYSE: OWW) and Travelocity, as well as a growing number of local Chinese players that could make expansion in the fast-growing Chinese market difficult. The TripAdvisor (NASDAQ: TRIP) spin-off has been positive for the company as a cost-cutting measure to survive competition.

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EXPE Free Cash Flow Yield data by YCharts

Despite competition, Expedia enjoys a relatively cheap valuation among travel stocks. In terms of free cash flow yield, Expedia appears to be attractive among peers like, Travelzoo (NASDAQ: TZOO) and TripAdvisor. 

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EXPE PE Ratio TTM data by YCharts

Considering the valuation of Expedia in terms of PE makes it even more attractive. Most of its peers have traded around a PE of 35x at their highest prices. With EPS of $2.47, if Expedia were rewarded with a PE of 35, the stock price would be $86.45. That’s a decent 35% upside from the current level.

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends and TripAdvisor. The Motley Fool owns shares of and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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