The online travel agency space has some investors worried about structural issuesthat will hinder growth prospects. But that isn't the case, according to one notable Wall Street analyst who turned bullish on Expedia Inc EXPE.
The Analyst
Morgan Stanley's Brian Nowak upgraded Expedia's stock rating from Equal-weight to Overweight with a price target lowered from $170 to $160.
The Thesis
The online travel agency space is a winner-take-most sector, and Expedia, along with its rival Priceline Group Inc PCLN, will combine for 95 percent of online growth, Nowak said in a Wednesday note. (See the analyst's track record here.)
Both Expedia and Priceline are projected to grow room nights at a 12-to-15-percent compounded annual growth rate through 2019, the analyst said.
Investors have reason to believe Expedia can generate stronger room night growth and profitability given a new strategic focus and various initiatives, he said.
Expedia is targeting international markets in Europe and Asia and looking to acquire inventory at properties outside of the 50 or so largest hotels, the analyst said. This marks a departure from a prior strategy of focusing only on the top hotels in international markets, which didn't give Expedia "much depth," Nowak said. Selection matters to customers, and an increased variety could lead to higher conversion and faster room night growth, he said.
Expedia's HomeAway property — which it acquired in 2015 — is focusing on driving user growth and market share in 2018 and beyond through the use of new methods like ranking algorithms and win-loss notifications to increase its data advantage, Nowak said. This marks a departure from recent years, when management appears to have been more focused on increasing headcount, technology and processors, the analyst said.
Bottom line, 2018 appears to be an investment year for Expedia, and 2019 will likely be a year where investors see the "benefits come through," Nowak said.
Price Action
Shares of Expedia were trading higher by 1.05 percent in the Thursday morning session.
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