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Morningstar | Dreaded Six-Letter A-Word May Come to Travel Industry; Narrow-Moat TripAdvisor Most at Risk

We see wide-moat Amazon’s announcement that it is offering domestic flights within India as a potential precursor to the company developing a metasearch platform (not an online travel agency, or OTA, model approach), which could have negative long-term financial implications for narrow-moat TripAdvisor, with a more negligible financial impact on narrow-moat OTAs Booking Holdings and Expedia. Expedia shares appear attractive, trading at a meaningful discount to our $183 fair value estimate.

Amazon has had several travel-related pilots in the past. The previous test was in 2014, when Amazon offered a limited number of hotels before canceling the venture in 2015. While Amazon has not disclosed the reasons for not moving forward with that travel initiative, we believe it is in part due to the significant time and cost needed to aggregate and service supplier relationships, which is what OTAs Booking and Expedia have developed over the past 20 years. Our long-held view has been that if Amazon decided to add travel to its platform, it would adopt the metasearch model, like that of Google and TripAdvisor, which depends on OTAs to place and power those aggregated supplier relationships on its platform. The India air announcement is in line with this view, as OTA Cleartrip is powering the relationship.

Should Amazon move forward with a full metasearch travel offering, it would become a more direct competitor to around 75% of TripAdvisor’s total revenue that is exposed to the metasearch model. While we await more details from Amazon India next week, if we were to reduce our 10-year TripAdvisor metasearch revenue forecast toward 5% annual growth from 6% (for traffic share loss to Amazon) and increase our 10-year marketing spending as a percentage of sales toward 48% on average from 47.5% (for higher customer acquisition costs), it would reduce our $59 fair value estimate by $3 per share.

The risk to Expedia and Booking would be more manageable and negligible to financials, in our view. An Amazon metasearch platform would represent an additional indirect channel to Expedia and Booking, requiring more marketing spending if it were used heavily by travelers. An offset would be the OTAs' ability to drive direct traffic, which both have successful done despite the increasing presence of Google’s metasearch platform over the past few years.