Expedia: Why investors can accumulate this stock

US markets are currently under significant pressure from a number of factors, including slowing growth, falling corporate earnings, persistent inflation and rising interest rates. The recent Silicon Valley bank fiasco has only increased the likelihood that markets will see further downside in the coming months. However, for long-term investors with a 3-5 year investment horizon, this situation presents an opportunity to acquire quality stocks at bargain prices amid market volatility.

One such stock investors can look to for the next several months is Expedia, a Nasdaq-listed online travel agency. With a 1-year forward PE of 10 and an EV/EBITDA of 6.6 (Bloomberg consensus estimates), the stock’s valuation is quite attractive, especially given its status as one of the world’s largest and oldest OTAs with decent growth prospects. Additionally, Expedia has a strong brand, a broad global customer base, and a healthy balance sheet that positions it well to weather any macroeconomic headwinds that may materialize this year or next.

Although the current valuation is attractive enough to buy now, we recommend investors to accumulate the shares over the next few months as the broader market risks are associated with macroeconomic pressures and economic uncertainty.

Business

Founded over 25 years ago, Expedia was one of the first OTAs to emerge globally as the internet revolution began. Hence, it has been a major player in transforming the travel and leisure sector over the past two decades. The company’s core competency is based on its brands, platform and technology capabilities, and delivery portfolio. Expedia uses this to provide travel and leisure solutions to business partners and to enable travelers to efficiently research, plan, book and enjoy their travel experience.

At the end of 2022, Expedia had around 3 million accommodations available for booking on its platform. It also had deals from 500+ airlines, travel packages, car rentals, cruises, insurance, and activities and experiences. Of the 3 million accommodations listed, around 900,000 are from hotels. The larger pie of over 2 million comes from alternative accommodation under its Vrbo brand. Vrbo is one of the biggest players in the short-term rental segment after Airbnb (which had over 6 million listings at the end of 2022).

Other major online brands owned by the company include Brand Expedia (full-service online travel solutions – flights, accommodation, rental cars, packages, etc.); Hotels.com, Orbitz, Travelocity, ebookers and the Wotif Group.

Expedia has three operating segments by business type — Merchant Model (66 percent of revenue), Agency Model (26 percent), and Advertising Model (8 percent). Under the merchant model – which consists primarily of accommodation-related bookings – the company acts as a registered merchant, providing travelers with access to hotel room reservations based on its contracts with suppliers. In this model, Expedia receives full money at the time of booking and later pays the provider based on their contracts with them. With the agency model, Expedia acts only as an intermediary in the transaction and receives commissions or ticket fees from the providers for each transaction. The bulk of agency model revenue comes from airline ticket bookings. In the advertising model segment, Expedia offers travel and non-travel advertisers access to potential sources of additional traffic via visibility on its numerous web properties.

In terms of geographic segments, the United States accounts for 68 percent of sales.

Current performance

After suffering the effects of the pandemic in 2020, when sales fell by over 50 percent, the company has made a strong recovery into 2022.

For 2022, Expedia reported revenue of $11.7 billion, down only slightly (3 percent) from 2019 (pre-pandemic) revenue. EBITDA of $2.08 billion (margin at 17.8 percent) and net income of 697 (6 percent) compared to 2019 numbers. Results would have been better but for fourth-quarter weather-related cancellations would have been 2022. Before the impact of the weather, EBITDA (excluding the impact of foreign exchange) was expected to exceed 2019 levels by a mid-teens percentage.

What has benefited the company, however, are strong trends in travel and leisure following weather-related headwinds. At the time of releasing Q4 results, the company provided an update on the strong trends seen in January and its expectations for double-digit revenue growth and margin expansion in 2023 (implying even better earnings growth) .

risk versus opportunity

Just prior to the impact of Covid in March 2020, Expedia stock was trading at around $120. After hitting lows of around $48 in March 2020, shares staged a multibagger recovery to over $200 by February 2022. This was in anticipation of a rebound in travel and leisure as revenge spending took hold. However, while travel and leisure trends broadly have indeed recovered and are performing well, as reflected in the company’s financials and 2023 outlook, shares have now corrected to just under $100. This dichotomy stems from fears of a recession in developed markets in 2023 or 2024. While the company faces the risk of a recession impacting travel and leisure budgets, the stock appears to have priced this in already. A valuation of 10x expected PE seems to adequately reflect risks (ie if growth is lower than expected and expected earnings are below expectations).

Expedia has a strong balance sheet with comfortable cash and cash equivalents of around $4 billion and positive free cash flow (FCF). In CY22, the company had (FCF) of nearly $3 billion and was FCF positive in each of the last ten years (except for the Covid-affected CY20). This puts the company in a good position to weather an economic slowdown. Given the risk of a slowdown, it’s wise to take a long-term perspective, and investors can accumulate stocks over the next few months rather than buying them all at once.

The long-term opportunity remains attractive. According to data in company filings, global travel spend is approximately $1.6 trillion. Expedia’s gross bookings are still only in the low single digits as a percentage (despite being one of the largest players) of global travel spend, presenting a huge market opportunity for OTAs (including Expedia).