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Network Effect Will Boost Expedia's Market Share

Recent acquisitions stand to add to the company's network advantage.

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 Expedia (EXPE) highlighted during its recent investor day how its strong network advantage has driven and will continue to drive market share gains in the travel industry. We are maintaining our narrow economic moat rating, which is driven by the firm's network effect, and think the shares are trading at an attractive discount to our $145 fair value estimate.

Expedia has built a leading network of travel inventory and traffic that is increasingly difficult to replicate, as this scale allows the company to increase its marketing and technology expertise and spending well above the rate of competitors. Expedia sees 450 million monthly visitors to its brands (versus 350 million for TripAdvisor). This traffic allows its 5,000 engineers to more effectively test ways to improve user experience versus smaller competitors, which ultimately leads to improved conversion. Similarly, this high level of traffic allows the company to constantly test and improve its marketing efficiency on distribution channels. Expedia spent $2.3 billion on direct marketing in 2014 (39% of total revenue) while number-three online travel agency Orbitz spent $334 million (36% of total revenue). Expedia and Priceline (PCLN) have grown to a level where it is increasingly challenging for the next-largest online travel agency to compete.

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Dan Wasiolek does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.