Booking Holdings (NASDAQ:BKNG) and Expedia (NASDAQ:EXPE) are both online platforms that facilitate the process of making travel arrangements such as buying airline tickets and making hotel reservations. However, the two companies are quite different and their financial results show it.
The key difference between Booking Holdings and Expedia is the markets they serve. Expedia derives a majority of its business from the United States while Booking Holdings primarily operates in Europe. At first blush, this might seem like a minor detail, but it is crucial to understanding the financial performances of the two companies.
Although online travel booking websites help users book a wide variety of accommodations including flights, rental cars, and local excursions, commissions on hotel rooms provide them with the vast majority of their profits due to higher commission rates. Websites like Expedia.com can collect as much as a 20% commission on the price of a hotel accommodation.
But the hotel markets in Europe and North America are quite different. While the United States is dominated by chains such as Hilton and Marriott, the European hotel market is primarily served by smaller boutique hotels. Large hotel chains control tens of thousands of rooms and centrally negotiate their contracts with online travel agencies, which allows them to secure more favorable contract terms and lower commission rates.
As a result, Expedia on average collects much lower commissions on its hotel business than Booking Holdings, which is a big reason why the Europe-centric company delivers higher profit margins.
Single vs. multi-brand approach
The other major difference between Booking and Expedia is their go-to-market strategy. Expedia was built around a patchwork of website properties it acquired over the years including Hotels.com, Orbitz, and Travelocity. By contrast, Booking Holdings still generates most of its revenue from its namesake Booking.com platform.
Branding matters. In Europe, Booking.com is a more dominant platform. There are certainly competitors, but it has a larger market share than similar websites in other regions. As a result, most of Booking.com's traffic comes from users who go to it directly, rather than being directed to it by a search engine. This significantly reduces its paid advertising costs.
Expedia certainly gets a lot of direct traffic to its website, but user behavior in North America tends to start with search engines like Google. For this reason, paid advertising costs eat up a larger portion of Expedia's revenue, again resulting in lower profit margins. This has also created a more intense competitive environment where Google can direct search traffic to competing websites.
For these reasons, Booking's more unified website strategy is a superior business strategy.
Over the last 10 years, Booking Holdings has delivered greater revenue growth than Expedia, as well as greater earnings-per-share growth.
Delivering superior EPS growth is easy when a company is significantly more profitable. A higher proportion of Booking's marginal revenue growth falls to the bottom line as compared to Expedia. What's more, Booking has been using a large portion of its free cash flow to buy back shares. Over the last 12 months, it has repurchased $8.7 billion worth of its own stock and has billions remaining in its current buyback authorization. And reducing the share count further enhances Booking's EPS growth.
Superior financial results have translated into superior shareholder returns for Booking Holdings.
Investors are usually rewarded when they invest in businesses with better financial models. In this case, Booking Holdings has a superior model to Expedia due to its geographic focus and its single-brand strategy. These circumstances won't change anytime soon; therefore, investors should continue to expect Booking Holdings' stock to outperform Expedia's.