Will Hyatt Really Leave Expedia?

We think it is unlikely no-moat Hyatt (H) follows through on threats to remove content from Expedia if a settlement is not reached prior to the expiration of its existing contract July 31. This is due to the power of the OTAs network advantage (source of Expedia’s narrow moat) and its importance to the hotelier. Should Hyatt decide to no longer use Expedia’s channel for the foreseeable future, we would likely lower our out-year unit growth forecast (which currently stands in the mid-single digits), as we would expect third-party owners to be hesitant to join the hotelier’s brand given the uncertain distribution strategy. We think this pressure for Hyatt would be compounded by its decision to increase marketing fees to its owners by 7% on July 1 in an attempt to drive more direct traffic. Our $48 fair value estimate would decrease by $2, in a scenario where we reduce our room growth forecast by one percentage point each year starting in 2020 and going through 2026. However, even if Hyatt were to cut ties with Expedia, we would not anticipate a change to our valuation for the OTA, given the small contribution of Hyatt to its total sales. Overall, we see shares of Hyatt as overvalued, with shares trading around a 20% premium to our $48 fair value estimate. Meanwhile, shares of Expedia trade at a slight discount to our $168 fair value, and we would use any pullback related to a potential Hyatt exit as an opportunity to build a position.

We believe Hyatt needs Expedia’s network more than the OTA company needs the hotelier’s room supply. We calculate Expedia generates nearly 10% of Hyatt’s room nights, while the hotelier was roughly 2% of the OTA’s total room nights. Additionally, traffic to Expedia’s website was 59.4 million this past May versus just 7.1 million that toured Hyatt’s online platform, according to SimilarWeb. Further, supporting Expedia’s scale, it counted 385,000 properties on its website during the first quarter of 2017, compared with only 708 for Hyatt.

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