COVID-19 hit several sectors, such as specialty retail and automobiles, fairly hard.
However, none has been as adversely affected by the pandemic as the tourism sector.
Travel restrictions and lockdowns led to a plunge in international travel demand and put over 100 million tourism jobs at risk.
Fortunately, 2023 looks much brighter for the tourism sector as international tourist arrivals are projected to reach 80% to 95% of pre-pandemic levels this year.
The airline industry is the first beneficiary that comes to mind, with the NYSE Arca Airline Index (NYSE: XAL) returning 14.6% year-to-date as of end February.
In addition, the MSCI World Hotels, Restaurants and Leisure Index also rose by 10.2%, showing a nascent recovery for the hospitality industry.
Air transportation and hospitality, in turn, fuel the growth of online travel agents (OTA).
We examine how two heavyweights, namely Booking Holdings Inc. (NASDAQ: BKNG) and Expedia Group Inc. (NASDAQ: EXPE), stack up against each other.
Highly similar business models
Both companies have largely similar business models classified under travel and advertising.
The travel model is further split into merchant and agency revenue.
Merchant revenue is recognised when booking platforms are paid the transaction fees for the respective transport and accommodation booked.
Agency revenues represent commission fees received from travel suppliers such as airlines and hotels.
Advertising revenues are earned when other businesses advertise on the websites of OTAs to tap on their online traffic.
There are many overlaps between both businesses’ strategies.
The key determinant of success is their international online presence, which is driven by user interface and experience, as well as the use of technology to assist travellers and enterprises.
Examples of technological usage include value-adding to travel choices made by customers and providing consumer insights to travel suppliers.
All these lead to higher bookings which then translate to higher earnings.
On this subject, let’s now compare both companies’ operating metrics.
Operating statistics differ
Total gross bookings in 2022 for Booking stood at US$121.3 billion compared to Expedia’s US$95.0 billion.
Both OTAs’ had fairly comparable breakdowns with approximately half of gross bookings coming from their agency and merchant models.
Their revenue breakdown, however, painted a different picture.
In line with higher gross bookings, Booking posted a higher total revenue for 2022 at US$17.1 billion, versus Expedia’s US$11.7 billion.
Booking has a more balanced contribution from both its agency and merchant models, while Expedia relies more on its merchant segment which contributed two-thirds of its total revenue.
The Advertising division remains a minor segment for both companies at under 8% of total revenue in 2022.
In terms of geographical breakdown, Booking is far more reliant on non-US consumers, with the Netherlands being the single largest revenue contributor.
On the other hand, Expedia’s US segment is stronger, representing 68.0% of its total revenues.
These differences have implications regarding the way investors think about both OTAs.
On the geographic front, tourism in Europe experienced a stronger recovery than that of the US.
This recovery may favour Booking given their larger European exposure.
Moving onto the business model front, Expedia depends more on its merchant model.
The merchant model requires Expedia to first book rooms in bulk from hotels before selling them on its platform.
The advantage of doing so is the ability for Expedia to bundle the sale of rooms with other complementary products such as land and air travel.
In exchange for the flexibility of dynamic packaging, Expedia runs a higher risk of obsolescence when rooms are unable to sell.
The natural response is, therefore, to offer discounts that erode margins.
Furthermore, given that eight of the largest 10 hotel chains in the world are based in the US, the higher bargaining power of these chains increases their ability to squeeze OTAs like Expedia.
To maximise their online presence, both companies incur three major expenses: Marketing, technology, as well as selling, general and administrative (SG&A).
In 2022, Booking spent more on SG&A while Expedia forked out higher costs in the marketing and technology departments.
Overall, Booking incurred lower expenses than Expedia, resulting in its operating income margin coming in at 29.9% which is more than triple that of Expedia’s 9.3%.
Booking also had a higher net profit margin which registered at 17.9%, nearly six times higher compared to Expedia’s 3%.
These numbers show clearly that Booking is a more profitable business than Expedia.
Higher expected growth for Booking
Of course, no discussion is complete without assessing the valuation of both companies.
Booking’s EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortisation) of 16.3 times is higher than Expedia’s 12.1 times.
Similarly, Booking’s EV/Revenue is also higher at 5.3 times as compared to Expedia’s 1.5 times.
However, on a P/E basis, Expedia is more richly valued at 43.8 times versus Booking’s 31.9 times.
Companies with higher expected growth tend to fetch higher valuations and, therefore, higher share prices.
Looking ahead for 2023 and 2024, the market consensus seems to imply that Booking’s growth will outpace that of Expedia in terms of both revenue and EBITDA.
Travel ETFs are good alternatives
A great alternative to buying stocks of individual companies is to invest in travel-related exchange traded funds (ETFs).
Some investors may not want to limit their positions to just airlines or hospitality companies.
ETFs such as the ETFMG Travel Tech ETF (NYSE: AWAY) and ALPS Global Travel Beneficiaries ETF (NYSE: JRNY) provide investors with exposure to many beneficiaries of tourism recovery.
Both ETFs are also well diversified across geographies.
Apart from risk reduction through diversification, it also takes significant time to understand each business.
With all that in mind, ETFs are certainly a worthwhile consideration for most investors.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.