EXPE - Expedia: With Bookings Re-Accelerating I'm Raising My Price Target

2023-12-05 09:16:25 ET

Summary

• Expedia's stock has soared on the promise of lower interest rates and stronger fundamental trends.
• Wall Street analysts are predicting significant revenue growth and operating leverage for Expedia in FY24.
• Despite the recent rally, Expedia stock remains significantly undervalued compared to its rival Booking.com.
• Raising my year-end 2024 price target on Expedia to $184.

The past month has been an excellent stretch of time for tech stocks, which have rallied sharply on the promise of lower interest rates in 2024. Even better is when this sentiment-based rally is additionally aided by stronger fundamental trends, as is the case with travel giant Expedia ( EXPE ), which has struggled this year as it sought to unify its brands under one umbrella and compete with its larger rival Booking.com ( BKNG ).

Expedia has soared since reporting strong Q3 results (on top of recent activist activity in the stock), bringing year-to-date gains above 60%:

With estimates rising, I'm boosting my price target on Expedia

I last wrote a bullish opinion on Expedia back in August, when the stock was trading closer to $110 per share. At the time, I had issued a price target of $132 on the stock, representing 14x FY23 EPS. Now, considering strong results in Q3, positive reception to the company's unification of its brands under the One Key rewards program, and an upward boost in estimates to FY24, I'm retaining my bullish position on Expedia and raising my price target for next year.

Buoyed by the strength of recent results (which I'll discuss in more detail in the next section), Wall Street analysts are now pointing to $14.08 billion in revenue for FY24, representing 10% y/y growth. Consensus is also expecting Expedia to generate significant operating leverage next year, with EPS expected to grow 29% y/y to $12.30.

Given the expectation of above-market earnings growth, plus the tailwinds from continued strength in the travel industry, I'm initiating a year-end 2024 price target of $184 for Expedia, representing 15x FY24 P/E and ~30% upside from current levels.

Note that even with the slightly expanded multiple versus my prior price target at ~14x earnings, Expedia still sits well below the valuation of its primary competitor, Booking.com at >20x P/E.

The long-term bull case for Expedia

As a refresher for investors who are newer to Expedia, here is what I view to be the long-term bullish drivers for the company:

• Travel demand continues to soar as consumers focus their spending on experiences- Even more than a year past COVID, travelers are catching up on lost vacations. Picking up on strong end-customer demand, airlines and hotels have also raised rates, which benefits Booking's commission model.
• Work from anywhere- Airbnb ( ABNB ) has cited this as a benefit to its growth in stays: now that many companies have allowed remote-work from anywhere, many travelers are opting to stay in vacation destinations for extended chunks of time, bringing their work laptops with them. This new "format" for travel has increased wallet share and spending on overall travel.
• Vrbo is Expedia's answer to Airbnb- Whether customers want to stay in a hotel or book a vacation rental home (both formats of stays, we now universally agree, are two entirely different types of vacations, with the former generally offering more creature comforts and the latter a more authentic, local experience), Expedia has the right option for its customers' preferences.
• One Key may help to unify Expedia's brands- Outside of its namesake site, Expedia is also home to Orbitz, Vrbo, Hotels.com, Hotwire, HomeAway, Egencia, and a number of other brands. The company's plan to unify all of its rewards programs under "One Key" has been met with strong traction and may help distinguish it against Booking.com, whose rewards system is more opaque.

Stay long here and ride the upward wave.

Q3 download

Let's now go through Expedia's latest quarterly results in greater detail. The Q3 earnings summary is shown below:

Expedia's revenue grew 8.5% y/y to $3.93 billion, ahead of Wall Street's expectations of $3.86 billion (+6.6% y/y) and accelerating 300bps versus Q2's 5.5% y/y growth rate. The company notes that it exceeded its expectations despite a number of global factors beyond its control: wildfires in Maui, where Vrbo has a large concentration of bookings, and geopolitical turmoil in the Middle East (which began to impact results in October).

As shown in the chart above, booked room nights (by far, hotel bookings are the largest source of revenue for Expedia and its family of apps) grew 10% y/y to 89.3 million, roughly flat sequentially between Q2 and Q3 (despite a usual seasonal decline between the two quarters). Management noted as well that hotel ADRs (average daily rates), as well as ADRs on Vrbo, continued to increase, reflecting strong travel demand and hotel pricing power.

Here's helpful anecdotal commentary from CEO Peter Kern's prepared remarks on the Q3 earnings call , detailing both bookings trends as well as the early consumer reaction to One Key:

I'm even happier to see our B2C business picking up momentum with year-over-year revenue growth in Q3, accelerating over 400 basis points sequentially [...] we are very happy with the early results and traction One Key had with our members.

We have already migrated over 82 million members to the program. And with the addition of Vrbo to the mix, we have seen 34% growth in new members over last year. We have already seen many members using One Key cash across brands, including on Vrbo and have been pleased that Hotels.com members have not been unduly impacted and have already been using One Key cash to shop for other products on Expedia.

Overall, these promising results have given us solid learnings that will be useful as we launch One Key in other countries next year. And with the Vrbo migration complete, we can now more fully lean into the core differentiation that One Key gives Vrbo in the vacation rental space. One Key, along with our ongoing efforts to more generally attract higher lifetime value customers, is accelerating our mix of loyalty members, app users and app members. And the percentage of bookings coming through our apps continues to grow and was up approximately 300 basis points sequentially in the third quarter, which ultimately contributed to our year-over-year marketing leverage in our B2C business for the third quarter."

Management also noted that B2B bookings have also grown tremendously, with Q3 revenue up 26% y/y - with a large contribution to growth coming from China, despite pronounced macro challenges in the region.

Profitability also continued to soar. As shown in the chart below, Expedia's adjusted EBITDA grew 13% y/y to $1.22 billion in the quarter, representing a 30.9% margin: 110bps higher than the prior-year quarter.

Key takeaways

With strong bookings trends, climbing profitability, successful tech migrations (One Key, Vrbo) and a modest valuation versus competitors that still leaves plenty of room for upside in 2024, there's a lot to like about Expedia heading into next year. Stay long here.

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