Why Are Expedia’s Margins Declining despite Growing Revenues?

For 4Q15, analysts are estimating Expedia’s (EXPE) EBITDA (earnings before interest, taxes, depreciation, and amortization) to increase 23% to $308 million with an EBITDA margin of 18%. For full year 2015, EBITDA is expected to grow by 10.4% to $1,132 million with an EBITDA margin of 17%, a decline compared to 2014.

Expedia’s EBITDA margins are expected to increase to 19% in 2016 and then rise to 21% in 2017. As a result, EBITDA growth is expected to increase to 42% and 27% in 2016 and 2017, respectively. That’s much higher than the growth seen in 2015.

Priceline’s (PCLN) margins are expected to increase to 41% in 2016 from 40% in 2015. TripAdvisor’s (TRIP) margins are expected to be constant at 31%, and Ctrip.com’s (CTRP) margins are expected to increase to 14% in 2016 from 9% in 2015.

EXPE has been increasing marketing expenses in a bid to capture market share. Most of these spends have gone to Google (GOOGL). For 3Q15, EXPE’s marketing expenses increased by 20% to $930 million.

Expedia sold a 62.4% stake in eLong earlier in 2015, which became a key driver behind the company’s return to profitability in 3Q15. The Chinese company had initially impacted Expedia’s bottom line negatively, and it’s expected to continue to do so, although the effects will be much softer moving forward.

As discussed earlier, Expedia earns 50% of its revenues from international markets where it books revenues in local currencies. In the past year, the US dollar has strengthened significantly against most currencies. This means lower dollar revenues for EXPE.

Increasing marketing spends and the strong US dollar will continue to be a drag on EXPE’s short-term revenues. On the other hand, the eLong sale will provide respite. The dollar probably will not stay strong forever, and any depreciation in the dollar would mean higher revenues and profits for EXPE.

EXPE forms ~1.4% of the Guggenheim S&P 500 Pure Growth ETF (RPG).