Morningstar - Q1 2020 - 67

EXHIBIT 1

In 2007, there were four leading global online
travel agencies, or OTAs: Booking Holdings, then
called Priceline; Expedia; Ctrip, which is a
leader in China; and Orbitz. It was competitive, but
Booking and Expedia had some advantages.
Booking was able to grow its network at a faster
pace because it was focused on more-profitable
international regions and hotel markets, versus
Orbitz, which was in the more mature and
less-profitable U.S. and airline verticals. Booking
was able to invest that profit back into its network
and grow its network to a greater extent than
Orbitz. Expedia was a larger company, even back
then, so it was able to use its scale to continue to
grow its network advantage relative to Orbitz.

Beyond Hotels and Flights Morningstar expects online booking of experiences
and alternative accommodations to grow at a faster rate than the online travel
industry overall.

By the middle of this decade, Orbitz couldn't
compete with Expedia, Booking, and even
Ctrip. Then, Expedia acquired Orbitz in 2015. Today,
after Ctrip, Expedia, and Booking Holdings,
the next largest OTAs are companies like eDreams
and MakeMyTrip, and those guys are one
fifteenth to one twentieth of the revenue size
of Booking or Expedia.

Source: Morningstar.

Experiences

Alternative Accommodations

18.0

17.7
14.5 14.2

13.6
10.7

Total Travel

16.1
14.0

9.7

International hotel markets are more boutique,
with a lot more independent hotels. Large
brand chains represent only 35% of all hotels
in Europe, for example, versus in the U.S.,
where chains like Marriott MAR or Hilton HLT are
70% of the total. Big hotel chains have more
negotiating leverage and don't have to pay the
commissions to OTAs that someone that just
owns one or two boutique hotels would. It's also
very tough to get all the relationships of
those fragmented, boutique hotel owners, and
Booking did that earlier than Expedia. Because
of its higher international mix, Booking's
profitability is higher than Expedia's.
The other distinguishing factor is that Booking
is focused more on accommodations-traditional

16.3

14.9

9.3

8.9

15

13.4

13.2

13.1

9.3

8.2

10
5
0

2019E

2020E

2021E

hotels and vacation rentals-while Expedia
has more of a focus on the less-profitable airline
industry. But they definitely compete with
each other in most all key markets and across
most all travel-type content.

Lallos: What distinguishes Booking from Expedia?

Wasiolek: What distinguishes them is where
they're exposed geographically and the type of
content they're focused on. Booking is more
international; 75% of its total bookings are focused
on international markets, with most of that in
Europe, whereas Expedia gets only around 40% of
its bookings in international markets.

Online Growth
20%

Lallos: It looks like Expedia's the more attractive
opportunity at today's valuations.

Wasiolek: Our long-held view is that Booking
Holdings is the best-positioned travel company.
But Expedia is a more interesting stock for
investors at this point. It has a very strong network
advantage itself. Morningstar lowered
Expedia's fair value per share from $185 to $170
on Nov. 10 to account for higher near-term
marketing expenses, but the stock still trades at
a meaningful discount as of this conversation.
Booking Holdings trades at a smaller discount to
our current $2,300 fair value valuation.
Lallos: Then, there is TripAdvisor, which is also
at an attractive valuation right now, but has more
concerns from bigger competitors.

Wasiolek: There are two business models
within online travel. Booking and Expedia are
online travel agencies. They take the time
and expense to develop a relationship with a hotel,
manage the descriptive content for that hotel
on their website, and service the booking
that occurs. TripAdvisor has a metasearch business
model. A metasearch company like TripAdvisor

2022E

2023E

2019-23 Avg.

does not own or control the relationship with
the hotel. OTAs or the hotels themselves
may decide to put their content on a metasearch
platform, particularly if there is a lot of traffic
going to that platform. But the barriers to
replicating metasearch platforms are lower than
those to replicating an OTA.
If you do a search in Google for hotels in Paris,
you'll see in the middle of the page hotel
and descriptive content. That is controlled by
Google. It's their metasearch platform that
competes directly with TripAdvisor. If travelers end
up booking travel on Google's metasearch
platform, that is a risk of share loss for TripAdvisor,
whereas Booking and Expedia have content on
both those platforms, so they're getting a
recognition of revenue and bookings either way,
although at a marketing cost that these
OTAs pay out to those metasearch operators.
Lallos: I recently used TripAdvisor to plan a family
trip because I found the community helpful. Is that an
advantage that TripAdvisor has over Google?

Wasiolek: Hundreds of millions of unique visitors
go to TripAdvisor each month and a lot of
those visitors go for the review content, which
is quite strong. Other players are starting
to replicate that, but TripAdvisor already has
a sizable amount of traffic and a strong network
advantage. What it needs to do is continue to

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