The global travel industry has been bludgeoned by COVID-19. This is not a news flash. With the pandemic keeping countless households at home — either voluntarily or because of shelter-in-place orders — it’s no wonder the online travel agency (OTA) industry reported dismal looking numbers during the second quarter of 2020. 

But what may be surprising is that shares of Expedia (NASDAQ:EXPE), as well as shares of larger rival Booking Holdings (NASDAQ:BKNG), have rallied and are currently down less than 10% so far in 2020. With so many people itching for a vacation, it’s not hard to imagine why investors have piled into Expedia stock. But before jumping on the bandwagon, consider a few factors.

A hammock on a tropical beach.

Image source: Getty Images.

Business travel may never be what it once was

For the sake of background, Expedia’s gross bookings (value of travel services reserved on one of its sites) took a precipitous 90% tumble in the second quarter to $2.71 billion. Resulting revenue fell 82% to $566 million, and adjusted losses were $577 million compared to adjusted earnings of $276 million a year ago. Gulp.  

However, on the last earnings call, CEO Peter Kern had this to say:

[The second quarter numbers] are noisy, obviously, and frankly I don’t think terribly telling. I would not try to dissect them. I think it’s a waste of a lot of energy.  

I agree, so I’m going to take Kern’s advice and ignore the virus-distorted figures. Travel activity is already mounting a rally, although the initial gains in the late spring have stalled out in the late summer months as the novel coronavirus continues to spread around the globe. Nevertheless, sooner or later the coast will clear and vacationers will start planning again.

But one lucrative group of customers may never be the same: Business travelers. OTAs don’t break down the numbers between leisure and business trips, but pre-pandemic statistics indicate that some 20% of U.S. travel was for business. Pre-pandemic airline tickets tell a similar story, with airlines’ business travelers making up some 12% of total passengers. However, as business travelers tend to spend more (last minute bookings, itinerary changes, upgraded amenities), some airline operators reported over a third of revenue came from this small minority — not including business people that opted to ride in the main cabin with everyone else.  

The rub here for Expedia is that while leisure travel could come back with a vengeance, the advent of digital tools (video conferencing, electronic signature, etc.) could permanently reduce the amount of business travel going forward. In fact, according to estimates compiled by Statista, business trips in the U.S. will still not be fully recovered to pre-pandemic levels by 2023.  

The age of direct-to-consumer is here

Not to worry, though, because Expedia has plenty of other projects to make a long-term rebound. But another risk going forward is that it’s not alone in its efforts. While Expedia and its peers like Booking Holdings were quick to the punch moving travel booking services online some two decades ago, the high commissions Expedia charges to accommodation providers and the proliferation of digital tools have prompted a move to direct-to-consumer movement.

Hotels are a case in point. Brands like Hilton (NYSE:HLT), InterContinental Hotels (NYSE:IHG), and Marriott (NASDAQ:MAR) have all doubled down on their own digital selling efforts — and have added customer rewards programs to encourage booking directly with them.

There’s also new competition in the space, like the elephant known as Airbnb. Expedia’s comparable Vrbo segment has been more than holding its own, and the unique property and accommodations listing segment was reportedly an outperformer for Expedia so far this year as it was before COVID-19.  

Nevertheless, all of this is to say that OTAs are looking like much less of a growth story than they were the last two decades. 

Cost savings may still win the day

If investors are prepared for a lower growth future for Expedia, though, one may not need to expect a quick and full recovery of travel activity. Expedia’s hand was forced by the pandemic to speed up its simplification plans and IT updates. As astutely pointed out by fellow contributor Billy Duberstein, the company has been consolidating some of its brands, moving operations to the cloud, and reducing its dependence on performance marketing (like Alphabet‘s (NASDAQ:GOOGL)(NASDAQ:GOOG) Google search, which has some competing travel booking services of its own) by forging some direct consumer relationships via its apps and own rewards programs.  

All told, what this equates to is a leaner and more nimble Expedia, yielding no less than $500 million in annual expense savings. Given Expedia generated $941 million in adjusted net income in 2019, those savings could be a significant contributor to the bottom line — even if travel activity remains subdued for some time. Don’t write off the powerful influence a leaner operation can have on a stock’s long-term performance.

Granted, with share prices already homing in on 2020 breakeven (but still down 35% over the last trailing three-year stretch), a more profitable Expedia looks fairly priced into the stock already at this point.

I’m not personally inclined to make a purchase right this moment, given the strong rally that’s already taken place and mounting competition against the OTA industry. Nevertheless, there’s a good chance Expedia has room to run higher in the coming years as effects of the pandemic lessen. Just expect nothing less than a wild ride if you decide to buy.