ABNB - Expedia: $5 Billion Share Buyback Amidst Record-Low Valuation

2023-11-03 12:24:59 ET

Summary

• Expedia's Q3 revenue and earnings estimates exceeded expectations while announcing a new $5 billion share buyback.
• The company achieved record-high lodging gross bookings and revenue, with strong growth in the B2C and B2B sectors.
• Expedia's continuous margin expansion and low valuation compared to peers create an attractive setup.

Overview

Shares of online travel and lodging company Expedia ( EXPE ) jumped over 16% in early trading on Friday, after beating both Q3 revenue and earnings estimates. The company also authorized a new $5 billion share buyback on top of its existing $1.8 billion share repurchase program.

Expedia saw strong overall booking metrics amidst strong demand for global travel, with its lodging gross bookings hitting a new high of $18.5 billion, an increase of 8% compared to the same period in 2022. This marks the highest level of gross bookings for any third quarter in the company's history. Revenue also saw a substantial rise, reaching $3.9 billion, up by 9% from 2022, setting a record for the company's quarterly performance.

The growth in revenue from the business-to-consumer (B2C) sector notably accelerated, outpacing last year's figures by over 400 basis points. The business-to-business (B2B) segment was particularly strong, with revenue climbing to a record $995 million, representing a significant 26% increase from the previous year.

Net income for the quarter was solid at $425 million. Adjusted net income was even more impressive, soaring to a record $778 million for any quarter. The company's adjusted EBITDA reached a milestone at $1.2 billion, which is not only a 13% increase from 2022 but also demonstrates a margin expansion of 110 basis points.

Record-Low Valuation

Expedia has struggled to effectively compete with market leader Booking Holdings ( BKNG ), which owns the popular booking platform Booking.com. In this regard, Expedia's marketing efficiency trails significantly behind Booking, which is clearly demonstrated in its overall lower margins and inability to scale effectively. Thus, Expedia's EBITDA margin ((TTM)) currently stands at just below 20%, compared to Booking, which boasted EBITDA margins of over 30% even at a much smaller scale. Moreover, Booking also holds higher growth rates, with revenue growing 21% in Q3.

Nevertheless, Expedia is growing its overall EBITDA margin at a higher rate, as Booking has little room left to further scale. In this regard, Booking's EBITDA margin fell from nearly 40% pre-pandemic levels to around 35%, due to higher marketing costs amidst increased competition for private lodging such as from Airbnb ( ABNB ). Expedia, on the other hand, continues to increase its margins, growing from 17% to over 20%. In the earnings call, management stated that due to strong revenue performance and expense control, with expenses overall growing slower than revenue, it delivered record EBITDA of $1.2 billion, which was up 13% with an EBITDA margin of almost 31%. Its free cash flow remains healthy too, at $2.3 billion year-to-date.

While I believe that Booking is the more quality business overall, and also a buy at current levels, the valuation discrepancy appears too large, given Expedia's continuous margin expansion. In this regard, Expedia trades at just 1.2 times Price to Sales (P/S) and at a forward Price to Earnings (P/E) ratio of 10, compared to Booking, trading at 5.6 times P/S and 20 times forward P/E.

Most importantly, however, remains the fact that Expedia's balance sheet remains strong , with liquidity of $7.6 billion, driven by unrestricted cash balances of $5.1 billion and an undrawn revolving line of credit of $2.5 billion. From a debt perspective, its debt level remains at approximately $6.3 billion with an average cost of capital at only 3.7%. Thus, its gross leverage ratio has come down to 2.4x. This allows for flexibility with regard to capital allocation, given its massive $5 billion share buyback, representing over 30% of Expedia's current market cap. To put this into perspective, this would be as if Apple ( AAPL ) announced a new $840 billion share buyback.

Takeaways

Expedia continues to reap the benefits of the global travel recovery, as evidenced by its impressive third-quarter results. The strong overall travel demand, particularly during the summer season, has bolstered its performance across all segments.

Nevertheless, the outlook for global travel remains uncertain, with potential revenue deceleration as consumers deplete their pandemic savings and look to save on travel. Economic uncertainties and the threat of another pandemic pose significant risks to the travel sector and Expedia, in particular. Nevertheless, if Expedia maintains its strong execution and leverages its aggressive share buyback program, there's room for share prices to rise despite near-term challenges.

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