2023-04-16 01:09:13 ET
Summary
- Expedia is the world's largest online travel agent service.
- Their reputation, market penetration, and scale are unrivaled in the sector.
- Recent headwinds resulting in lackluster demand for travel have hurt shares.
- Very strong 2022 seems to have gone unnoticed by investors.
- Promised profitable 2023 means shares are ridiculously undervalued.
Investment Thesis
Expedia ( EXPE ) is the world's largest online travel agency (OTA) serving millions of customers each year across the globe. Their established nature within the industry has garnered the company a reliable and trustworthy reputation among consumers.
COVID-19 hurt their business significantly. However, the company has since begun an initiative to reduce costs while increasing profitability to ensure pre-pandemic returns are achieved and exceeded.
A very strong 2022 seems to have gone unnoticed by investors, with significant promised returns in 2023 being almost assured. However, a complex and rather pessimistic macroeconomic environment means evaluating the motion to build a position in the company is difficult.
Therefore, a deep dive analysis is required along with an intrinsic valuation to deduce whether or not an investment opportunity could exist for a deep-value oriented investor.
Company Background
Expedia.com | Homepage
Expedia is a Seattle, WA based online travel agency specialized in providing customers with the opportunity to book accommodation, flights, rental cars, and other travel services. The company has been in operation for over 25 years and is one of the most renowned and trusted online travel companies serving North America and Europe.
The company has over 3 million lodging properties available with hundreds of thousands of flights, holiday packages and cruises also available to customers. These services are provided to customers through mobile and desktop platforms.
Accompanying their OTA business is a host of marketing and media businesses which Expedia believes helps the company to retain a competitive advantage over the competition in a highly competitive market environment.
A fundamental company analysis and intrinsic valuation must be completed to fully understand what sort of investment opportunity may lie in this global leader in the OTA market for value-oriented investors.
Economic Moat – In Depth Analysis
Expedia has a relatively narrow economic moat but one which provides the company with sufficient economic moat in the OTA market. The primary drivers of their moatiness are the established reputation the company holds along with a wide-spread network.
Simply put, Expedia is one of the largest players in the OTA marketplace and shares this dominant position with key rivals Booking (previously Booking .com). By being one of the first OTA’s to hit the market Expedia has built a reputation and awareness in the minds of consumers across the globe.
This reliable reputation also acts to increase customer satisfaction thanks to increased peace of mind for consumers when booking holidays. Given the large amounts of fraud occurring within the travel booking industry, Expedia’s reliability undoubtedly acts to increase the strength of their economic moat.
Expedia’s large scale operations, high levels of brand penetration and reliable reputation also act to create a significant networking effect for the company where word of mouth referrals are a key source of new customers.
The truly remarkable portfolio of products available to be booked through Expedia’s platform further increases the breadth of customer demographics Expedia is able to serve. This further allows the company to increase the number of travelers using their services.
Unfortunately, despite Expedia’s stellar reputation and broad scale of operations it is difficult to assign the company anything but a narrow economic moat. While their platform is very flexible and can easily be manipulated by the user, it fails to accomplish anything truly unrealizable by a potential competitor as illustrated by sites such as Booking or Hotel Planner.
The company’s reputation is the only real source of economic moat as building such a reliable and reputable brand image takes years of good business practices to accomplish.
While Expedia’s operations are unique enough thanks to their strong brand recognition, good business practices and wide selection of products, their moat is not bulletproof.
From an industry-scale perspective the company undoubtedly has one of the strongest moats of any company, yet even this achievement leaves Expedia open to threats from possible new entrants and existing competitors.
Financial Situation
Expedia.com | Who Are We?
Expedia has been a largely profitable company for the last two decades, not including the unfortunate and irregular impact the travel restrictions due to the COVID-19 pandemic had on their operations. Their 5Y net margins have been a consistent 4.5% combined with solid operating margins of approximately 7%.
While these metrics are not fantastic especially when considered from an absolute perspective, there is more to Expedia’s story than these fundamental operational efficiency indicators may lead us to believe.
Expedia notably operates their business utilizing around 470 days payables with days sales being around 70 days. This means there is a significant time-lag between Expedia receiving revenues and having to pay their COGS.
Unfortunately for the company, the significant payables they still had due throughout the COVID-19 pandemic meant margins were harmed significantly and the company’s position looked much less solid than it used to be.
This also means that over the next year Expedia should benefit from decreased operating costs thanks to the large cuts in expenditure the company realized throughout the pandemic. These efficiency-oriented decisions have led to the company decreasing their annualize run-rate fixed costs by about $750M compared to their Q4 FY19 figures. The company has also managed to decrease their variable costs by over $200M.
The company also took the difficult COVID-19 pandemic as an opportunity to improve the efficiency of their marketing operations. Management maintains that the company is on a mission to increase their overall operational efficiency and is constantly evaluating additional opportunities to increase the streamlining of their business.
These key cost-saving initiatives should lead to increased EBITDA margins according to Expedia’s management.
When considering Expedia’s full year 2022 results, these cost savings seem to have absolutely achieved the increased operational efficiency the company was looking to accomplish. In 2022 Expedia recorded revenues of $11.7B, up 36% compared to FY21 and representing a new high for the company.
Net income saw growth of over 300% compared to 2021 and their EBITDA clocked in at just over $2.3B. These very healthy income metrics are complemented by the company achieving full year FCF growth of 70% compared to pre-pandemic levels in 2019.
Expedia Full Year 2022 Report
This strong growth was primarily due to a 31% increase in the number of gross bookings for the year 2022 with significant growth being drive by their B2B operations (seeing a segment revenue growth of over 74% compared to 2021) and intercompany eliminations.
Expedia Full Year 2022 Report
Expedia’s lodging service sales continue to produce the company with the largest revenues representing approximately 80% of total revenues. Air bookings are notably still significantly below their pre-pandemic levels, which suggests continued growth should absolutely be expected in this segment too.
Expedia Full Year 2022 Report
Expedia’s COGS for 2022 decreased 3.5% as a % of revenue which suggests their cost-cutting measures have had a lasting impact on the company’s profitability and operational efficiency. The company has also reduced their administrative expenses by 2% as a % of revenue.
Seeking Alpha | EXPE | Profitability
Thanks to the company’s newfound operational excellence, Seeking Alpha’s Quant assigns Expedia with an “A” profitability rating. I believe this is a relatively representative snapshot depiction of the organizations profit generation abilities.
The company has around $6.2B in long-term debts with a majority of senior notes maturing after 2025. Most of these debentures are secured on fixed rates which helps shield the company from the increasingly contractionary monetary policy being pursued by the Fed and central banks across the world.
Expedia’s balance sheet looks to be in healthy shape. The company has a debt/equity ratio of just 2.87 which is fantastic to see from an investor perspective. Their quick ratio (current assets minus inventory divided by current liabilities) is just 0.58.
These fiscal stability metrics suggest Expedia is well protected against any liquidity issues. Fitch recently revised their credit rating on Expedia's debt paydown as BBB-; the outlook is now stable.
Overall, Expedia is a relatively profitable operation with significant future growth on the horizon. Their strong 2022 is expected to be surpassed by an even more lucrative FY23 all the while the company has maintained strong and robust fiscal fundamentals.
Valuation
Seeking Alpha | EXPE | Valuation
Seeking Alpha’s Quant has assigned Expedia stock with a C- Valuation rating. I find this valuation slightly pessimistic given their strong 2022 year and expected revenue growth for the in 2023.
The firm is currently trading at a P/E GAAP FWD ratio of 13.46 and a P/CF TTM ratio of 4.15. Furthermore, when considered against a FWD EV/EBITDA ratio of 6.37, the possibility of an undervaluation being present is real.
Seeking Alpha | EXPE | Summary
From an absolute perspective, Expedia shares have fallen a significant way away from their almost $200/share high back in May of 2022. After shedding around 50% of its value in just under a year, all the while their operations have produced even greater revenues and profits, it is difficult to justify a rational reason for this seeming pricing error.
While the company has left investors over the last five years with nothing but dead-money, the positive future the company is about to embark upon driven by strong travel demand could help shares recover the ground lost previously.
By accomplishing a simple financial valuation based on the calculation below and using the estimated 2023 EPS of $9.37 an ultra-conservative r value of 0.04 (4%) and the current Moody’s Seasoned AAA Corporate Bond Yield, we can derive a base-case IV for Expedia of $150.
When using this conservative CAGR value for r, Expedia appears to be under-valued by 44%. A slightly more optimistic CAGR value of 0.06 (6%) leaves Expedia being valued at around the $186 mark, 52% more than its current valuations.
The Value Corner
Therefore, I believe Expedia is currently sitting somewhere between undervalued and deep-value territory. Both it’s absolute comparison to historic share prices combined with an intrinsic value calculation suggest the company’s shares are trading at a substantial discount.
In the short term (3-10 months) it is difficult to say exactly what the stock will do. Much depends on the prevailing macroeconomic conditions and the ability of global economies to skirt a recession in 2023. Given that most fundamental market metrics are forecasting a recession, significant uncertainty exists for the stock moving forwards in the short-term.
In the long term (2-4 years) I fully expect their position as a leader in the OTA industry to become stronger. Their reliable brand reputation, good selection of services and products to choose from combined with significant market presence means any arising threat from a competitor should be relatively predictable.
The current undervaluation present in the travel provider suggests building a position from a deep-value oriented perspective could be a real possibility. If share prices drop another $5-$15, a real fat-pitch case could be present.
Risks Facing Expedia
Expedia faces risk from a few different perspectives with the most notable threat arising from a recessionary environment leading to a decrease in travel bookings.
The company’s revenues hinge entirely on the ability for people (be it financially or physically) to travel. A recessionary period would undoubtedly lead to a decrease in the number of bookings the company would be able to secure thus leading to total revenues decreasing substantially.
Any further development or emergence of a new pandemic could also hamper the company’s profitability as their operations cannot easily be scaled to meet significantly smaller traveler numbers.
Even without a substantial global event taking place, the travel industry is a notoriously competitive and cyclical industry with margins being slim for almost all companies operating within the sector.
Expedia.com | Sustainability
From an ESG perspective, Expedia faces little threats with the company being dedicated to producing a positive impact for all entities and third parties impacted my it’s operations.
Their Open World and Prosperous Planet initiatives to improve environmental and social situations across the globe is welcome news to many ESG oriented investors.
Summary
Expedia has had a relatively flatline history from an investor standpoint with returns for the past 5Y being essentially nil. However, the company’s newfound operational efficiency combined with a booming travel sector means the future looks very positive for the online travel provider.
Historically low share prices both from an absolute and intrinsic value perspective suggests the company is currently undervalued by the market mechanism. No clear rational reason exists for this valuation, besides perhaps short-term uncertainty over the direction global economies may be taking throughout 2023.
A further $5-$15 share price drop would mean the firm becomes an undeniable fat-pitch for value-oriented investors. This earns Expedia a Buy rating with a Strong Buy occurring around the $80 price-mark.
While current valuations are already quite attractive, the uncertainty surrounding the travel industry as our economy slowly moves towards a recession means an even deeper valuation would be necessary to warrant a Strong Buy rating.
Other possible fat-pitch ideas include the Finnish bank Nordea and U.S. toy manufacturer Hasbro about whom I have written articles previously.
For further details see:
Expedia: Company Deep Dive, Intrinsic Valuation