Amazon.com, Inc. AMZN dabbled in the online travel space through Local and Destinations but hasn't seen much success — but now the industry is prime for disruption, according to Morgan Stanley.
The Analyst
Morgan Stanley's Brian Nowak maintains an Overweight rating on Amazon's stock with an unchanged $1,500 price target.
The Thesis
Amazon's successful foray into groceries consisted of four steps, Nowak said in a research report. Amazon tested groceries, then it struggled in groceries, then it spent a decade learning the sector. Finally, the company acquired Whole Foods outright to enter the space.
" ... We don't count AMZN out of any sector indefinitely," Nowak said.
The online travel space is "built" on advertising spend efficiency and conversion, which bodes well for Amazon's platform of hundreds of millions of buyers, Nowak said. Amazon is estimated to spend 75 cents on advertising per transaction, which is a "fraction" of what Booking Holdings Inc. BKNG and Expedia Inc EXPE spend, the analyst said.
Amazon's 92-percent contribution margin — after advertising — is up to two times higher than traditional online travel agencies, according to Morgan Stanley.
Amazon would merely need to deploy sales and marketing teams with expertise in signing up hotels in order to enter the online travel agency space, Nowak said. The required dollar amount "isn't large" relative to some of Amazon's other initiatives, and existing online travel agencies spend an estimated $620 million on their global hotel supply team annually, the analyst said.
Should Online Travel Companies Be Worried?
Amazon's reputation of "aggressive pricing" could extend to offering hotels lower commission rates, which "hotels would like," Nowak said. Amazon's leading scale and ability to leverage its data to drive conversion would similarly be appealing to hotels, he said.
Investors may be quick to point out that Booking and Expedia combine for more than 2 million properties, but it took around 20 years to do so, the analyst said. But Amazon could offer potential partnerships, affiliate relations or acquisitions to "move faster."
A conservative estimate would yield Amazon a $600 million annual operating profit, even if Amazon's hotel business is just half the size of Expedia's hotel business and has a 15-percent lower gross profit per transaction, according to Morgan Stanley.
At the high end, Amazon's annual profit potential in the travel space is more than $1.5 billion, Nowak said.
A How-To Guide To Holiday Travel: Hotel Edition
Photo courtesy of Amazon.
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