ABNB - Expedia Could Book Another Strong Upside

2023-12-15 05:37:17 ET

Summary

• Barclays downgrades Expedia and Airbnb, expecting a slowdown in travel spending next year.
• The International Air Transport Association predicts record airline revenues and increased travel in 2024.
• EXPE stock buyback and adoption of artificial intelligence could support its growth with the stock still undervalued.

Expedia ( EXPE ) saw its stock downgraded by Barclays this week with analysts projecting a slowdown in travel over the next year. That was in contrast to an IATA report the previous week expecting a bump higher in air travel. In this article, I will try to uncover who is right and how it plays out for the travel firm.

Barclays downgrades travel firms for 2024

Expedia has had a stellar year in 2023, with gains of 61% year-to-date in its stock price. However, Barclays analyst Trevor Young downgraded shares of the company, alongside Airbnb ( ABNB ) as he expects travel spending to slow next year.

"We think online travel growth slows from here as eventually, the 'pent-up' travel demand will get exhausted - particularly as consumers' wallets are increasingly under pressure," Young said.

"EXPE has had a great run in 2023, and as we look ahead at potentially decelerating bookings and revenue growth as our outlook for travel softens a bit, we think it makes sense to lock in some profits and step to the sidelines," he added.

Young removed his buy rating on Expedia but still upped his target price to $150 from $136 previously.

IATA sees airline revenue at a record in 2024

The comments from Barclays are in contrast to a report last week from the International Air Transport Association (IATA).

The group projected total revenues for airlines to grow 7.6% year-over-year to reach a record $964 billion. They added that they expect 4.7 billion people to travel next year, which would be higher than the pre-pandemic level of 4.5 billion recorded in 2019.

The IATA's predictions were also backed up by its own November passenger polling data. The surveys found a third of travelers were traveling more than they were before the pandemic, while 49% had similar travel habits.

Looking ahead to 2024, the data found that 44% believe they will travel more in the next 12 months than in the previous 12 months. Only 7% of those surveyed said that will travel less, while 48% will maintain 2023 levels.

Downside risks for Expedia gains

The initial downside risk to a bullish thesis for Expedia is that the IATA is extrapolating passenger numbers from pre-pandemic and adding some global growth trends. We also have a survey of passengers who are not generally not forward-looking on the economy.

The Barclays analysis is adding some consumer trends so we need to take a macroeconomic approach, alongside airline and passenger optimism.

Expedia's 2022 annual report said that air traffic only makes up 3% of revenue. Lodging was the key driver of total worldwide revenue in 2022, accounting for 76%. Room nights stayed grew 29% in 2022, as compared to a growth of 35% in 2021 and a decline of 55% in 2020.

So, if air traffic grows in 2024 as expected then we can expect stronger lodging bookings for the company. However, if customers were feeling stretched as Barclays suggested then they may revert to vacations closer to home and still need lodgings.

Therefore, the big downside risk would be a recession, but only Deutsche Bank and Nomura are among bank analysts seeing heightened risk. Goldman Sachs' Jan Hatzius said last week that recession risk is low . The Federal Reserve has boosted that outlook this week by leaving interest rates at current levels and projecting three cuts in 2024, which could give consumers more confidence in the coming months.

The takeaway is that Expedia's recent growth trends should have a margin of safety with economic and passenger trends.

The $5 billion buyback tailwind

Michael Burry of "The Big Short" fame revealed in his latest 13F filing that Expedia was the largest stock holding in his hedge fund. The company provided him with a strong return after third-quarter earnings when it announced a large $5 billion stock buyback. That will be another tailwind and support for the stock in 2024.

Expedia stock is up 50% since that November 2 earnings release, but there is still another 50% ahead of the company's all-time high set in February 2022 at $217.72.

Other highlights from the third quarter earnings report were the release of the One Key loyalty program in July and some record metrics. Lodging gross bookings of $18.5 billion were at record levels for any third quarter. Revenue of $3.9 billion was a record for any quarter. B2C revenue growth accelerated over 400 basis points and B2B revenue at $995 million was a record.

Any analyst who wants to talk about the squeeze on consumers should consider those figures that were set during a period of high inflation and rising interest rates. As inflation cools and the Fed cuts, we could see a resilient consumer.

Going back to the IATA numbers, North America was the largest growth region alongside the Middle East and the U.S. provides the bulk of revenue for Expedia by geography at $7,939 vs. $3,728 for the full year 2022.

The underlooked potential for AI

An area where Expedia can gain is the adoption of artificial intelligence. The company announced in April that it was beta testing a new experience with OpenAI for a travel planning app. Expedia members can get a full travel advice experience with the ChatGPT bot.

Peter Kern, Vice Chairman, and CEO said: "By integrating ChatGPT into the Expedia app and combining it with our other AI-based shopping capabilities, like hotel comparison, price tracking for flights, and trip collaboration tools, we can now offer travelers an even more intuitive way to build their perfect trip."

Artificial intelligence could also offer more efficient advertising, which is a large expense for Expedia. The company could also get a boost from problems at rival firm Booking Holdings Inc. ( BKNG ), which has been caught up in a hacking scandal in the UK.

Valuation assessment for EXPE

According to Seeking Alpha data, EXPE has a price/earnings ratio of only 15% earnings, but this is 55% lower than the company's five-year average of 33.92.

Trailing twelve-month ratios for Enterprise Value/Sales and Price are also lower than their five-year averages by around -34% and -20% respectively. Expedia still provides value for investors on those key metrics.

Conclusion

Expedia currently trades at a cheap valuation compared to its historical averages, but there are tailwinds available to target the all-time high once more.

Problems at Booking.com could bring customers to Expedia, while the company is also seeking to embrace AI tools, which could streamline the booking experience for customers. The stock was downgraded by Barclays this week on consumer weakness, but I think that was ill-timed as the Federal Reserve shocked markets with a planned pivot to three rate cuts in 2024. As inflation cools and mortgage payments come down, customers could be emboldened to travel. I also said that any weakness in air traffic would likely still bring lodgings income to Expedia from staycations. Finally, the $5 billion stock buyback will also add further buying support and investors should consider buying Expedia here. I would add that prices down to $125 should provide support on a pullback for scaled entries.

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