Online Travel: A great potential for Amazon?

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Amazon.com, Inc. has a long history of branching out from its core e-commerce business and successfully disrupting other industries. However, one of the few businesses Amazon has been unsuccessful in tackling has been the online travel industry, but Morgan Stanley analyst Brian Nowak says Amazon may soon get serious about travel.

Amazon has twice dipped its toes into travel in the past with Amazon Local and Amazon Destinations, neither of which gained much traction among users.

According to Nowak, Amazon initially had similar disappointing test trials in the grocery business before going all-in with its Whole Foods buyout.

Nowak says Amazon already has two major advantages when it comes to launching an online travel business – scale and customer loyalty. Amazon has over 300 million global customers on its platform, and it has made its reputation for low prices and reliable service.

"Further, AMZN's focus on selection/service, pricing, and frictionless payment that drive conversion and stronger user economics also translate directly to travel," Nowak says.

Morgan Stanley estimates that Amazon's advertising spend per transaction could be much lower than online travel giants Booking Holdings (BKNG) and Expedia (EXPE) thanks to Amazon's proven ability to drive repeat and internal traffic on its platform.

There's a large barrier to entry in online travel for most companies due to the cost of global hotel supply. Nowak estimates Booking Holdings and Expedia spend roughly $620 million each on their hotel supply annually, but that number pales in comparison to the $6.4 billion Amazon is spending on streaming video content in 2018.

If Amazon is able to build a successful online travel business, Nowak says it could provide a huge boost to the company's bottom line.

"Our sensitivity table shows that if AMZN could build an online hotel business even 50 percent the size of EXPE's hotel business ... it would add roughly $600 million to operating profit," Nowak says. He says a more aggressive approach and/or a more efficient ad spend could bump that operating profit as high as $1.5 billion annually.

Regardless of Amazon's potential travel opportunity, Nowak is bullish on the stock. Morgan Stanley has an "overweight" rating and $1,500 price target for AMZN stock.

Read more: Google Flights: A new move into travel