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Battle for the Beach: Expedia vs. Booking Holdings

By Daniel B. Kline - Aug 23, 2019 at 7:23AM

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Which of the two travel gurus is the better buy? More importantly, how can they climb out of the rut they’re in?

On this week's episode of Industry Focus: Consumer Goods, host Shannon Jones and Motley Fool contributor Dan Kline scuba dive into the travel industry, especially focusing on how its two biggest players compare to the other. Learn the difference between Booking Holdings' (BKNG 4.92%) and Expedia's (EXPE -0.82%) business models, how these two are branching out in different directions, the big existential threat to both of their long-term futures, which one is the better investing play, and why the even better bet might be to sit this one out. Plus, vacation master Dan shares some advice for getting better deals on the customer side of these sites and some other ways to save money when traveling. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on Aug. 20, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Tuesday, August the 20th, and we're talking Consumer Goods. I'm your host, Shannon Jones, and I am joined via Skype by Foolish contributor, travel guru, I think you've got about a million titles now, Dan. Dan "the man" Kline is joining us today. Dan, how's it going?

Dan Kline: [laughs] It's good! I actually saw you for about 30 seconds a week ago.

Jones: All of 30 seconds, we were able to make happen while you were here at Fool HQ.

Kline: I don't think the listeners understand just how busy Shannon is on any given day.

Jones: [laughs] That's so true. And I was pushing it for that 30-minute stretch. I was pretty sure I was late for a meeting with Tom Gardner at some point. But, I wanted to make it happen, because it's always good to see you, Dan. 

I'm really excited about today's show. Last time on the Consumer Goods show, we basically kicked off summer travel season by diving into cruise operator stocks. Today's show, we're going to continue on that travel theme, especially as we approach Labor Day, the unofficial end of summer. We're going to be talking about online travel booking stocks, and maybe get a few tricks of the trade from traveler guru himself, Dan Kline while we're at it. We'll dive into two of the major online travel and reservation sites, Booking Holdings and Expedia. Two companies, Dan, they control over 70% of the online travel market. That is huge to me.

Kline: Yeah. I will say, both companies have made travel easier and harder. Back when I first started traveling for business -- I'm 45, my first business trip came when I was 20, so you can do the math there. A lot of years ago. We called a travel agent who had magic tools in front of her, probably some sort of computer, and figured out what the best price was for what we were trying to do. Now, when I book travel -- and I travel two or three times a month; I come up there usually once a month -- when I book travel, there's always this nagging suspicion that I've somehow left money on the table because when you look at the various properties owned by Booking, which include Priceline, KAYAK, itself; or Expedia, which owns Expedia, Hotwire and a whole bunch of other things, there's all sorts of different ways to book travel, and it's not always easy to figure out which one to use. And that benefits these companies.

Jones: That's a good point. Let's actually dive right into Booking Holdings. This would be the largest of the two. Actually, just from a market cap standpoint, it has a market cap of $82 billion right now. The company previously known as Priceline, and it's gone through a couple of name changes. Now it's known as Booking Holdings, ticker BKNG. Dan, I was looking at Booking Holdings. 2019 hasn't necessarily been a great year for them so far. At one point, they were down nearly about 20% off of their highs from 2018. But, tell us first, what is Booking Holdings? They've got a lot going on.

Kline: They're a collection of travel sites; in addition to that, they own Open Table, which is somewhat of an outlier, though it's obvious to see how restaurant reservations and travel match up pretty well. But, their core sites in the U.S. are, which is kind of a traditional travel site -- you go to and you say, "I want to visit Orlando a week from now. I'd like to stay in a hotel, and I don't want to make any stops." And it gives you the best pricing or the most convenient pricing -- it actually gives you multiple options. Sometimes it's the cheapest, and the cheapest can be really strange, like, you leave from one airport and fly home to another. And, you can pick cheapest or best, and all sorts of different options. 

Priceline is a travel bidding site. This is actually my site of choice. What happens on Priceline is, you can go in and you can see what's available and what the prices are. Then, you have a couple of other options. Priceline is famous for its Name Your Own Price tool. What that means is, I can say, "You're showing me hotels in Alexandria, Virginia downtown. The cheapest hotel is the Westin for $199 a night." That's where I usually stay. "I don't think that's the best deal I can get." So, you have two options. You can go into Express deals. Express deals will show you the area of the hotel, how many stars it is, and what its rating is -- basically, do people like it or not, on a 0% to 100% scale. And you can say, "Alright. I want a three-star hotel, Alexandria, Old Town, I don't care what it is," and you get it, and it comes back, and it's one of four hotels because there's only a few in the area, and you're relatively happy with it. Or, you can do Name Your Own Price, which doesn't show you any price. You say, "Alright, I want a three-star hotel," same thing, "downtown, Old Town, Alexandria. I'm only willing to pay $75 for it." And you put that offer in, and it might come back to you one of three ways. It can reject your offer. They might come back and say, "Hey, nobody's willing to sell it to you for $75. But if you increase your offer to $92, you have a really good chance." In fact, I've almost always gotten my room when it does that. The third choice is, it comes back and says, "Hey, you didn't get it," and you have the option to go in and make some changes. You can lower your star rating, you can add another area, you can change your dates. And it becomes this game of, how low will the hotel go? Same thing for airfare. And, when it comes to airfare, there's certain parameters. You can say, "No redeyes." But, if it's a short trip, you might find yourself booking tickets that leave late Monday night and really early Wednesday morning, and it minimizes your trip. So you have to be really careful, but I find that it's an area where you can save a lot of money if you're not married to one particular brand or another.

Jones: Dan, I have to ask -- I've never used Priceline, but in using that service, the Name Your Own Price tool, what's your success rate when you submit a price? Would you say 90% of what you submit gets accepted? What does that look like, percentage-wise?

Kline: If I'm using Name Your Own Price, it's probably 60/40. That said, I'm only going to use Name Your Own Price in an area I know really well. For example, Alexandria is not a big city. When you look at how Priceline in its full disclosure area breaks it up, you can see that there's four to five three-star or four star-hotels that are sort of close to the office. The farthest one away is a little bit far in the winter, so you might want to take an Uber if it's snowing or it's really cold out. I know the area, and nine months out of the year, if I do a blind bid, I know that yes, I want to get the Westin or one of the two or three hotels very close to the office; on the other hand, I won't be upset if I get the one that's about 1.25 miles away. So, I know the area; I know every possible hotel it's going to put me in; and I'm comfortable doing a blind bid. 

Sometimes I'm less comfortable doing a blind bid. Maybe I got rejected on one and I need to expand my area, or I couldn't get the Express deal I wanted, and I want to try different things. In those cases, you really just have to do your homework. Look at what's around, figure out what the brands are. You can see what was just booked. And sometimes, if you do the Express deal, it gives you little hints, like, "You've stayed here before." Well, if I've only stayed at one hotel in that area, I know what it is. If I've stayed at two or three, you have to think, "Gee, did I like all those hotels?" When I stay out by Baltimore near the casinos, there's three or four hotels of the same star range, and two of them are walking distance and two of them are not, and sometimes I'd really prefer being walking distance, so it makes sense to not do a blind bid and to book something when I know what it is. 

So, you have to be very, very strategic, and you have to do your homework.

Jones: Got it. So, Priceline being just one of the brands under the Booking Holdings umbrella. They've also got the Priceline version, in their international reach. Right now, Booking Holdings is in over 230 countries, so they've got a pretty massive footprint. Some of the other brands, I think you mentioned them, you've also got Open Table, They've also got KAYAK. KAYAK is interesting to me for a couple of reasons, but I'd say more so because KAYAK operates as really an aggregator of a lot of these online travel sites. The reason why this stands out to me, Dan, is because I've heard Google, I've heard Amazon and other major players are also really beefing up their efforts in this space. So, when I hear that they do have some sort of aggregator, I do get a little bit excited. But what are your thoughts around KAYAK?

Kline: KAYAK, which I use a lot, becomes almost an extra party in the transaction. If I book travel through Priceline, Priceline gets a cut from the airline or the hotel. If I book travel through KAYAK, what happens is, I put in the parameters of where I want to go, and I pick, "Gee, yeah, I'd like to look on Priceline, I'd like to look on Orbitz, I'd like to look on four or five others," and KAYAK brings up these other sites, and it shows me all my different options. I would assume they get paid a small cut if I book. So, it becomes even more slicing up the pie in different ways. 

I find KAYAK is a very useful tool for figuring out where the baseline is. Like, I want to travel to this place on this date and stay at this level of hotel -- roughly, what's that going to cost me? Oh, OK, it's $900. Then maybe I'll use other tools to figure out if I can get a cheaper deal. But you need to know what the price range is. Like, flying indirect is going to cost way less than flying direct; some of those things. It's really about doing your homework and doing research.

I don't love KAYAK as a business because I don't see it really being a tool where you complete your travel deal all that often. And the company does not break down each individual segment of its business. But, it is very useful, and it does fit very well with the rest of the family.

Jones: Booking Holdings, as an investor, as I'm looking at financials, I know they started the year pretty weak. A lot of the earnings, apparently some weakness in the European markets. Again, Booking has a massive international presence, particularly in Europe, where you see a lot of those boutique hotels that oftentimes, just due to scale and resources, aren't going to have staff that can list those hotels across all these different sites. So, you've got somewhat of a sticky model, especially in those European markets. So, we saw some weakness there at the start of the year. But it sounds like the most recent quarter, though, we were starting to see some signs of improvement. 

I guess the question I would have for you, Dan, is, is Booking Holdings right now still a slow growth story? Or is it really just a value stock right now? I mean, they've gotten hammered.

Kline: It's both, kind of. They are going to grow slowly, but I think there is a major storm cloud facing not just Booking but also Expedia. It's that every brand has an incentive to create a one-on-one relationship with customers. My travel partner of choice, I would say, is Southwest Airlines. And one of the things you notice with Southwest is, they do not appear on any of these websites. That's not 100% true, but in general, they only sell direct to consumers. If I want to fly Southwest, I book through Southwest -- meaning Southwest keeps all the money, they don't have to pay a third party, and that in theory helps them keep their price down. If you've seen the recent Hilton commercials, they are pushing you to go to their app, promising you the best price, or that they'll give 25% back if you find a better price. That's a little tricky, too, because they won't give you a better price if you made a blind bid, because you already have the room, you can't get rid of that blind bid deal.

So I think there's a negative headwind here that more and more companies, whether they be airlines or hotels, are going to start finding ways to create that one-on-one relationship. It used to be, you'd pay a lot more going into a hotel or airline website to book. That is still sometimes true, but there's not a lot of logic in that, because when there are all these alternative sources -- so, I worry about and Priceline and their ability to operate as a middleman when middlemen may become less necessary.

Jones: Such a great point. Just looking at their Q2 numbers, revenue was up 8.9% year over year. Looks like they brought in $3.8 billion. I think one of the metrics that matters, though, especially for those that are diving into this stock -- and, Dan, I know you've been watching this -- it really comes down to their actual bookings. The bookings is where you should really be focused.

Kline: Yeah. The great news is, they booked 12% more rooms. On the other hand, their income stayed about the same. That means that they're being squeezed on the edges. They're either taking less money as a way to offer consumers lower prices to sell more rooms, or their partners are striking harder deals. They don't really explain which one it is. It could be both of them. You want to see growth in how many rooms they sell because the more rooms also means the more of a habit it is. I actually go to Priceline first when I'm booking hotels. When I'm booking travel or plane flights or rental cars, they are not the first place I go. So, you want to see the habit build. You want to see more people use it. On the other hand, you'd like to see them make more money when they effectively sell more units.

Jones: Exactly. But I have to wonder with this industry in general, and investing in this space, it seems like it's only going to become increasingly crowded moving forward. I mentioned some of the bigger players, but you also have smaller players. Can you expect to see low-single-digit top line growth for most of these companies moving forward? Do you think, in addition to all the things that you mentioned that are actually putting pressure on there, that this is just an overhang on the industry itself?

Kline: Booking is forecasting between 2% and 4% growth for the full year. That's fine. And they may be able to, as a company, figure out how to lower expense. Obviously, they have a huge technology investment, but they don't have inventory. They don't need a lot of things once they get to a certain place. So, they might be able to increase profitability. But, yeah, I think there's increasing competition for where and how you book travel. I got my mail today, and this is going to sound ridiculous, but I had four different direct traveler offers. Two from cruise lines, one from an airline, one from a middleman service. It's like everyone is pelting you. There's new competitors coming in. There's new ways to aggregate. There's new ways to incentivize. So, if you're Priceline, if you're, you have to constantly be adding new sites or new services in order to cut off people who are offering comparable things. Something Priceline has dabbled in is offering different deals after a certain time of night, meaning, "Hey, it's 7:00, I don't feel like driving all night, I'll grab a hotel room. Hey, here's what the deals are." Well, they're doing that because there's other start-up competitors that, specifically, that's their business. It's like late night hotels, and you're going to pay less because you're not going to be there for 12 hours, but the hotel is going to make some money on a room that otherwise might have gone unoccupied. So, you have to keep innovating, and that's a drag on your eventual ability to just make money.

Jones: Yeah. On top of that, you really have to spend to build the brand awareness. For a lot of these online travel sites, it's ultimately becoming a commodity. For me, when I am looking to book travel, I don't necessarily care which site I'm on; I'm looking for the best price. Whatever is the best price, on whatever site I can find, is who I'm going to go with. You don't necessarily have that strong brand loyalty, so it's really about spending on advertising costs to build brand awareness instead.

Kline: Yeah, and it's really to capture customers. We've all seen the endless Priceline ads. There's plenty of ads. The reality is, once I've input my credit card somewhere, it's a lot easier for me to purchase there. I don't currently have a credit card with, say,, which is an Expedia brand, which we'll talk about soon. So I might find a great price there, but if Priceline's pretty close, I might book through Priceline just because I don't want to have to type in all my information and remember that I have a credit card another place. The reality is, advertising is all about driving someone to make that first purchase, and if that first purchase goes well, that probably becomes another tool in your arsenal where it's much easier to use it. That's partly why I use Priceline for rental cars sometimes. Sometimes I book through Southwest, where you don't have to pay until you pick up the car; sometimes I book through Priceline, where, depending how you bid, you may pay when you pick it up, or you may pay, if you do a blind bid, beforehand. But those are the two companies that have my credit card. I'm not necessarily going to go search out a slightly better deal but have to go through it all again.

Jones: Fair enough, Dan. Fair enough. Let's switch gears and talk about the other major player in this space, and that's Expedia, ticker EXPE. It's sporting a market cap right now of $19 billion. Smaller than Booking Holdings, but nonetheless a major player in this space. What can you tell us about Expedia, and how is it different from Booking Holdings?

Kline: The companies are very similar, but I think it's fair to say that Expedia is more rooted in the traditional, let's call it a digital travel agency model. You go to a site, it shows you a bunch of choices, gives you the brands, and you book in a traditional way. Now, they own sites that don't do it that way. Hotwire is a blind bid site. But Orbitz, Travelocity, even CheapTickets, a lot of their sites are based in the old school model, just in a digital way. That said, they also own Vrbo, which is Vacation Rental by Owner. I don't remember if that's actually their name anymore, but that's how it started. Vrbo is an Airbnb-style service built around vacation homes or places you would stay on vacation, where you can go in and say, "I want to go to St. Petersburg, Florida. Can I rent a home for a week? I want three bedrooms, two bathrooms, I'd like a pool to be there," and it comes back and gives you prices, and it facilitates the transaction through generally not a brand, but a person. And they've integrated Vrbo, which they bought for $3.9 billion along with HomeAway in 2015. They've integrated that into a lot of their core product, where, when you're looking for travel, it might also show you options or give you the option to choose options that are not traditional hotels, but residences or other properties that are through Vrbo. So, it's a similar but different business model.

Jones: This actually intrigues me the most about Expedia because they have been putting so much focus on Vrbo. I've personally used Vrbo. I've used Airbnb before. This alternative accommodation market is continuing to grow. The fact that they have this under their brand and are really tapping into that, especially, I think, with a lot of millennial travelers who are looking for that home-like appeal, but aren't necessarily wanting to spend a ton of money, I think that niche right there is definitely met with Expedia and Vrbo. I think, from Expedia, even though they're a smaller player -- granted, I guess you could say they've been hurt, too; their revenue and their bookings are, I guess you could say, stagnant at this point, Dan.

Kline: Yeah. In the most recent quarter, their bookings are up. Both companies follow a similar pattern, which is logical. It's also worth pointing out, Priceline does, on some occasions, or, various sites, offer you, let's call them Airbnb-style rentals. It's just in an unbranded way. The advantage that Expedia has is, Vrbo, whatever you want to call it, it's a brand name, it's something you trust, it's integrated into their product. And as someone who travels a lot, it reminds you that that's an option. Sometimes when I visit the office, I travel with another Fool, usually Matt Frankel or Maurie Backman, both of whom have appeared on the show. When I do, sometimes it might come up and say, "Hey, you could rent this two bedroom condo that's walking distance from there." And you go, "Ooh, that'd be nice. Have a kitchen, a refrigerator, a living room, that'd be great." So, integrating it that way gives them another tool, another reminder, another way to get it done. And it's helped them. Their revenue has inched up $3.2 billion in the most recent quarter, that's up about 9%. Bookings are up 11%. That said, net income has been up, but it's maybe not as strong as you'd like it to be.

Jones: Yeah. I think, what we saw even in that home rental segment, they are still struggling. There's concerns, especially with competition like Airbnb out there. And then also, listening to the conference call, there was a decision to streamline a lot of its brands to further emphasize Vrbo. I think that will likely hurt the stock in the short term, although I do think over the long term, it makes sense to put more emphasis, especially when it comes to SEO, and getting an optimized ranking on Google Sites, because Google is both friend and foe in this space. So, I think, short-term headwinds for Expedia, but long-term, their renewed focus in this space makes sense.

Kline: Yeah, and there's a short-term, let's call it legislative problem. The whole concept of renting out your home for a short-term basis has been dealt with in a lot of tourist markets, or some of the bigger cities, but the vast majority of the country still has to decide how it's going to handle it. I know that in my building -- I live in downtown West Palm Beach, Florida -- you are only allowed to rent your property 11 times a year, and it has to be for at least a month. Some people rent for shorter terms and find clever ways around it by writing the lease for a month; and some people just flaunt the rules. That's going to become an issue. There's going to be taxation, there's going to be pushback from hotels. And for the next two or three years, I expect there to be a little bit of instability in that business as you see certain cities crack down, certain cities lighten up. But, that is all going to get worked out, largely because you can see where the economy is going. We're past the point where this whole gig economy -- and Airbnb and Vrbo fit into that, with an individual renting out their home to make extra money, for the most part. That's all going to happen. So, the near-term outlook is maybe a little bit uneven for that business. The three to five-year outlook is that this is going to be a growth area, and Expedia owns one of the two names that matters in the space.

Jones: Yeah. That entire segment -- houses, apartments, non-hotel-like properties -- make up about 20% of all accommodations out there. You could see this certainly gaining traction over time. You made a great point about the regulatory landscape. Very similar to with Uber and Lyft. They're plowing ahead, and regulations then have to catch up. So I think, yeah, in the short term, you're going to continue to see some headwinds there. 

Dan, if you had to pick as an investor between Booking Holdings and Expedia, which would you say is your top pick?

Kline: I'm going to go and point out that I wouldn't invest in either for the reason I spoke of before. I think every brand that I'm regularly a customer of is going to figure out how to have a direct relationship with me. That is going to cut away some of my business from third-party booking services. If I had to pick, I believe in the Priceline branding more than I believe in the Expedia travel agent model. I think people want a deal, and I don't think the core Expedia offering offers a deal. There's convenience, and it's a very good product, the technology is great, but Priceline is somewhat of that lottery, where you might save a lot of money. And just for that reason, I'd be more inclined to do that. But honestly, I wouldn't invest in either one.

Jones: Yeah, I can see the argument on both sides. I think if I had to choose one, it would probably be I think that massive global presence -- granted, it's no longer a growth story. There's not a growth story for Expedia, either, right now. But I think that massive European presence, and their partnerships that they're making with OTAs in China, as well, are intriguing to me. I think, as Booking tries to strengthen its network effects through acquisitions, and really trying to stand up a lot of these other verticals that they're going after, the concern for me is, with so many different brands -- this even applies to Expedia -- how do they make sure that they stay focused? At one point, Booking was even into mortgages, they were doing gas. I do worry about that over time. But I'd say, just given the size and the scale, and having that, especially when you're competing with the likes of Google and Amazon, I would probably give the hat tip to Booking.

Kline: To give a last thought, we mentioned Open Table. Booking owns Open Table, which is a restaurant reservation service. They make money by the restaurants paying them, I don't know if it's per booking or there's a monthly fee, but it's a different model. What they've been doing recently is integrating Open Table into Priceline. Probably other services as well, but I've seen it at Priceline. So when you go in to look at your hotel room, you have a button right there that says, "show nearby restaurants." And it shows them in Open Table. And you can very easily make a reservation. It takes some of the guesswork out of, "Gee, how far from my hotel is that restaurant?" And you can see that becoming a platform, where it integrates across a lot more areas, that gives an added value to what Priceline, what, what all their other services are doing in general. It's kind of an outlier of a product, but it actually strengthens the whole brand. And frankly, it makes a lot more sense than being the Priceline of mortgages, which I think they were at one point.

Jones: Yeah, totally true. And, they're also doing this attractions business, where they're trying to generate some revenue off of some of the activities and tours and things that you do when you go to some of these cities. They're certainly trying. Again, this is not a growth story. I think, if you're an investor, as long as you recognize, this isn't really a growth story right now, it's going to be slow-going. But all in all, I think staying away until we get a better idea of what is going to happen on the competitive landscape makes the most sense.

Kline: I'm with you on that.

Jones: Alright, that will do it for us here in the Industry Focus: Consumer Goods show. We want to thank you so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Dan Kline, I'm Shannon Jones. Thanks for listening and Fool on!

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