Summary
- Expedia Group has seen strong growth in revenues and earnings.
- While long-term debt remains higher than 2019 levels - the company has seen a reduction in long-term debt over the past year.
- Given an attractive P/E ratio, I take the view that the selloff of the stock seems overdone.
Investment Thesis: With an attractive P/E ratio and strong growth in earnings, I take a bullish view on Expedia Group.
Expedia Group ( EXPE ) saw considerable downward pressure on its share price in 2022 - in spite of a strong post-COVID recovery:
The purpose of this article is to investigate whether the strong decline in price that we have seen in the last year is justified given company performance, and whether the stock could see upside in 2023.
Performance
When comparing Q3 2022 performance with Q3 2019 performance (the latter chosen as a baseline for performance before the COVID-19 pandemic), we can see that adjusted EPS of $4.05 in the most recent quarter has exceeded that of $3.37 for Q3 2019.
Q3 2019 Earnings Release
Q3 2022 Earnings Release
Moreover, it is also interesting to note that while gross bookings still remain below that of Q3 2019 - that of revenue and operating income has exceeded that of the same quarter.
According to Expedia, gross bookings represent the total value of bookings made in a particular time period, adjusted for cancellations and refunds - i.e. over $23.9 billion worth of bookings were made across the platform for Q3 2022 which are reflected in this metric even if a significant portion of these bookings do not materialise immediately.
For instance, a customer may make a booking in one particular quarter for a later period. Depending on the booking terms, this may not convert into revenue until the customer has actually paid for and used their booking in the later period.
In this regard, the fact that revenues remain higher than Q3 2019 even if gross bookings remain lower could signify that customers who are making bookings on the platform are following through at a higher rate, i.e. customers are potentially cancelling at a lesser rate than what might have been seen pre-COVID.
From a balance sheet standpoint, we can see that Expedia Group's long-term debt has increased over this period - with total assets remaining at a similar level.
Metric | Sep 2019 | Sep 2022 |
Long-term debt (excluding current maturities) | 4170 | 6237 |
Total assets | 21381 | 21879 |
Long-term debt to total assets ratio | 19.50% | 28.51% |
Source: Figures sourced from Expedia Group Q3 2019 and Q3 2022 Earnings Releases. Figures provided in USD millions except the long-term debt to total assets ratio. Long-term debt to total assets ratio calculated by author.
In this regard, while the growth in revenues and earnings has been encouraging - the higher long-term debt load may be of concern to investors which could have contributed to bearish activity on the stock.
Looking Forward
Going forward, fears of a potential recession in 2023 may dampen investor outlook on booking activity and further downside in the stock cannot be ruled out if investors become particularly bearish for this reason.
With that being said, we can see that Expedia's P/E ratio has declined back below levels seen pre-2020, while earnings per share (on a normalised diluted basis) is back to near a 10-year high.
This could indicate that the stock is potentially oversold at the current price. Should earnings growth remain vibrant, the stock could potentially have significant upside past the $200 mark - which is the same level that was achieved towards the beginning of 2022.
Additionally, I expect that investors will pay more attention to whether Expedia Group can continue to reduce its long-term debt. Long-term debt stood at $6.2 billion for September 2022, and while this is higher than the $4.17 billion in September 2019 - it has still decreased from $7.7 billion in December 2021. Should this trajectory continue, then I expect that investors will become more bullish on the stock's prospects once we start seeing more risk appetite in the markets overall.
Conclusion
To conclude, Expedia Group has seen significant growth in revenues and earnings in spite of a sharp decline in its stock price over the past year.
I take the view that given recent performance, the stock is potentially oversold at this point. I take a bullish view on Expedia Group.
For further details see:
Expedia: The Selloff Seems Overdone