OVERVIEW
The major takeaways from the 4Q17 earnings season was improving ad efficiency for both the OTAs (BKNG & EXPE) alongside decelerating revenue growth trends for the meta players (TRIP & TRVG). We suspect those factors are somewhat related, and the lackluster commentary from the meta players suggest both are likely to continue, if not intensify. Both TRIP and TRVG have suggested/implied that they will be pulling back on online ad spend; TRIP said so explicitly while TRVG's 1H18 declining revenue guidance suggests as much. In turn, that would suggest that meta won't be stepping in front of the OTA's traffic as much, which means the OTAs should be able to acquire that traffic more efficiently. Put another way, the OTAs will not have to pay the middleman as frequently as they had been, so they should be able to lever that ad spend more effectively toward room night-growth.
EXPE
Once again disappointed on 2018 EBITDA guidance, officially guiding to 6-11% growth after implying it would be in the low-teens range on the 3Q17 call. The shortfall could be attributed to cloud investments (~4% headwind), but mgmt should have been able to account for that back in late October when it first started speaking to 2018 EBITDA growth. However, we estimate that EXPE also saw a notable improvement in ad efficiency in 4Q17, suggesting it is also benefiting from the meta pullback. Further, EXPE could see additional leverage on its online ad spend given less competition from BKNG, which appears to have waning appetite to bid on that traffic. That said, we suspect consensus 2018 room night estimates are now within reason, and our composite of data trackers suggests 1Q room nights growth may accelerate off of 4Q levels. Question is whether it can beat on EBITDA at the same time; improving ad leverage is naturally a tailwind, but mgmt's line item guidance is giving us some pause. Question is whether the latter is a headfake or legitimate headwind; especially considering mgmt's recent history with its EBITDA guidance. For now, we're moving EXPE to our Long bench as a potential intra-year trade, but still need to get comfort on EBITDA before doing anything.
BKNG
We elevated to Best Idea Long last week. BKNG has fully comped past the OWW share-shift hangover that we'd been avoiding for the better part of the last year (hence the four consecutive misses on room-night guidance). We estimate that consensus 2018 room night estimates have now finally rationalized, and the sweetener is what appears to be a sea-change in terms of ad efficiency, more so than the aforementioned meta tailwind could explain. It appears that BKNG may be the only OTA to have figured out how to lever brand advertising (e.g. TV), which despite doubling y/y is still only 10% of its total ad spend. Ultimately this means that BKNG's ad spend now has a lot more firepower, which makes it lot easier for mgmt to respond to a shortfall in demand if, say, room-night growth is tracking below consensus.
Let us know if you have any questions or would like to discuss in more detail.
