Flying High, But Still a Buy

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

January was a big month, as most airlines around the world reported record load factors. Load factor is a mathematical metric that calculates the utilization rate of an airline or a vehicle. Naturally, if an airliner has a high utilization rate, it would look to increase its fare. But the US airliners chose not to hike their air fares due to weak macroeconomic conditions. Since airliners are not capitalizing on their high load factors, consumers won’t have to pay extra and air travelers won’t suffer.

So who stands to benefit here?  Online Ticketing Agencies (OTAs) like Expedia (NASDAQ: EXPE) and Makemytrip (NASDAQ: MMYT)!

Blockbuster Earnings

Expedia is one the largest Online Ticketing Agencies in the world, and enjoys the greatest market share. In a recent earnings release, Expedia proudly announced that its quarterly revenues spiked by 24%, the fastest in the last 5 years. This growth was mainly driven by strong room bookings. Its domestic room bookings were up by 19%, while its international room booking surged by 49%. Overall its room bookings grew by a record 33%, and as a result its revenues from hotel bookings rose by as much as 25%. Yet its management feels that it has not yet fully realized its potential in European exotic destinations, and said that it would be working towards improving its inventory in the region. In a market with cutthroat competition, this kind of growth is really commendable, and management expects the music to keep playing. Analysts estimate its EPS to grow by nearly 20% over the next year.

A Strategic Acquisition

Its biggest competitor, Priceline (NASDAQ: PCLN), acquired Kayak last year for $1.8 billion. Kayak is a meta search engine that compares airline fares offered by various online ticketing portals. The management of Priceline explained that with the acquisition, it would not only earn higher revenues by advertising but would also get higher targeted traffic, which would eventually boost the sales of Priceline.

Following the expansive drive, Expedia also announced that it would be acquiring a 61.6% stake in Trivago for around $628 million. Trivago is a simple hotel meta search engine based in Europe, covering over 600,000 hotels and spanning over 140 booking sites and 30 countries. The hotel search engine has been attracting over 20 million hits every month, and once the acquisition is through, Expedia will able to direct paid traffic to its booking portal. Moreover, this would boost its web traffic, and Expedia will not only earn more moolah from Cost per Click advertising, but will also have the option to hike its advertising fares. I think Trivago will be able to dominate and demand higher advertising rates on the back of heavier targeted traffic, post-acquisition.

The Final Word

Expedia competes with Makemytrip, Cleartrip and Asian markets are known to have low margins but huge volumes. Its peers have been giving better deals in the subcontinent, and consumers from the region do not prefer Expedia for their domestic travel needs. As a matter of fact, Makemytrip recently reported 25.4% growth in quarterly revenues, and expects the Bull Run to continue. But Makemytrip has a small global presence, and its shares appear to be hugely overvalued (forward P/E of 75x). Expedia has not been able to capture the Indian and Chinese markets, which leaves room for growth. Although its shares have risen by nearly 155% over the last 5 years, they trade at forward P/E of 14.9x. I think Expedia is a great growth pick, and deserves a Buy Rating.

PiyushArora has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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