Expedia Has 'Less Room For Growth,' Morgan Stanley Sees 20% Downside

In a report published Wednesday, Morgan Stanley initiated coverage on Expedia Inc EXPE with an Underweight rating and $75 price target. This implies a potential downside of more than 20 percent from its recent price point of about $94. Similar to Priceline Group Inc’s PCLN case, the firm is worried about slowing room nights and rising competition pressuring the company’s top and bottom lines.

Related Link: Morgan Stanley Thinks Priceline Is Now Worth $1,300

The firm believes that “Street expectations for margin expansion and a near peak multiple are too optimistic in this environment.” On the contrary, the firm sees “negative revisions driving underperformance and multiple compression.”

According to another report recently rolled out by the firm, “two large OTAs (Expedia and Priceline) are more penetrated than most believe –they already make up 61% of the online leisure hotel market. The low-hanging fruit have been picked and weaker competitors have been acquired –Travelocity, Orbitz, Wotif. Going forward, we see rising room night competition between EXPE and PCLN and between the OTAs and “brand.com” (Marriott.com,etc.). Nonetheless, EXPE's organic room night growth is set to slow to 15% (from 22%).”

Other concerns around Expedia’s business are the decreasing gross profit dollars per room night and the increasing ad spending per room night. Given these issues, Morgan Stanley projects EPS of $3.31 for 2015, and $4.27 for 2016, 15 percent and 9 percent below the Street’s estimates, respectively.