Expedia: Some value here, but too much uncertainty now (NASDAQ: EXPE)


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Investment thesis

I believe the reopening rally has gotten ahead for many travel businesses. Expedia (NASDAQ: EXPE) the stock repeatedly broke all-time highs throughout 2021 and early 2022, even though underlying activity was slow get over. Now that the stock has more than halved, I think it might be time to analyze the business in more detail.

List of Expedia Properties

List of properties from Expedia (Expedia Annual Report 2022)

The company has a certain strength. With its many properties, Expedia is broadly diversified across most key travel industry markets. The core business also seems to have stabilized from the effects of the pandemic.

Unfortunately, there is great uncertainty regarding the company’s operations in more than a few months. I just don’t believe the most likely trading results show enough growth for the company to be grossly undervalued. The company also took on more debt, diluted its stock and stopped returning cash to shareholders in the wake of the pandemic.

For these reasons, I am not interested in investing in Expedia at this time. But I think this uncertainty could create a good buying opportunity over the next two quarters. I’ll be monitoring a few key metrics over the next few months to assess whether Expedia is becoming a good investment.

Indicator #1: Booking trends

There are promising signs for a return trip. Expedia’s latest earnings call was bullish, with management saying accommodation bookings for February, March and April were even up from 2019 levels. The company is doubling down on Vrbo, which it said was l number one downloaded application in the first quarter of this year.

According to Expedia’s latest 10-Q record, quarterly gross bookings have increased significantly, by almost 60% year-over-year. Last quarter’s revenue margin also strengthened by 1.1 percentage points. These reflect a strong improvement in travel trends so far this year.

Yet all of Expedia’s numbers are still down from their 2019 levels. Accommodation, which management has spent the most time focusing on, appears to be the most resilient segment. But the company’s air travel, advertising and media segments are all well below their 2019 levels.

Expedia Geographic Revenue Breakdown

Created by the author using data from Expedia’s 10-K repositories

The international travel segment is also struggling. Revenue from outside the United States has historically accounted for 40% to 45% of revenue, but by 2021 that number had dropped to just 24%. I hope to see a rebound in this segment and others as pandemic restrictions continue to be lifted. I think these booking trends and the overall revenue mix of the business will be a bullish sign if they start to revert to historical averages.

Measure #2: Air travel

Another key indicator I monitor is air travel. This is tied to general travel trends, and I expect strong flight demand to correlate with increased travel demand. This is particularly relevant for Expedia since airline revenues have fallen much more than its other segments. Revenue from Expedia’s air segment fell by more than 70% from 2019 to 2021, compared to just under 24% for its accommodation segment.

Even as fears of a recession intensify, I think most airfare indicators have remained exceptionally strong. TSA passenger numbers have seen solid year-over-year growth, although most numbers are still down from their 2019 levels. International air travel has also begun a strong rebound, even surpassing its 2019 levels in some regions.

What I’m specifically looking for are signs of continued and sustained strength in air travel through the late summer, fall and winter, indicating that the travel industry is still in high demand. For more detailed data, I will look at both earnings and forecasts for major carriers such as Southwest Airlines (LUV), Delta Air Lines (DAL), and United Airlines (UAL).

Indicator #3: Business travel

Another major part of the business that I look at is Expedia’s B2B segment. Business travel is another core business segment that has been slow to rebound from the pandemic. During his latest earnings call, the Expedia CEO called the segment “undervalued by the markets” and said he expects it to overtake the consumer sector by percentage over the course of the year. of the next few years. I also agree that this is a huge opportunity for Expedia, and I like how the company is creating more accessible B2B options for its partners.

At the same time, I don’t know how quickly demand might rebound. Some data points indicate a slower recovery. For example, the American Hotel and Lodging Association released a report in April stating that it expects business travel revenue in 2022 to be down nearly a quarter from 2019. I I will monitor the results of this segment in the next quarterly reports from Expedia.

Financial condition of Expedia

During the pandemic, Expedia had to take drastic measures to remain financially stable. The company has cut its dividend, possibly for good. Share buybacks have been suspended indefinitely. Since the last pre-pandemic report, Expedia shares outstanding have risen more than 12%. Full-time employees have been reduced by more than 40%. Expedia also had to significantly increase its debt. During 2020, Expedia took on more than $3.7 billion in additional net debt.

While all of this has a negative impact on existing shareholders, I don’t think it’s as bad as it sounds. This level of stock dilution is not as extreme as other travel companies. Carnival (CCL), for example, had to nearly double its outstanding shares to stay afloat. Expedia also took the opportunity to pay off its high-interest debt. Most of the new debt issued is at very low interest rates. Specifically, one billion is in 0% interest convertible notes, and another billion is in 2.95% notes not due until 2031.

More directly, it seems to me that this crisis is easing. Over the past two quarters, the company has begun the process of deleveraging. The company has paid off $1.9 billion in debt over the past year. During his last earnings call, the company’s CFO discussed this process:

Remember there are 2 main ways to get this [Debt to EBITDA] report down. One is debt repayment, which we are actively considering and, secondly, developing on that from an EBITDA perspective. We expect EBITDA to be robust at the start of this year as we recover more fully. And if the trends continue, and we will certainly look to prove our ratios in this area to open up other options for EBITDA.

But even if the company’s cash flow normalizes, I think the company will still have to deal with the financial consequences of the pandemic for some time. For potential investors, this means that it may be some time before Expedia has significant free cash flow to return to shareholders.

final verdict

It is difficult to evaluate a company like Expedia in this environment. Traditional valuation methods such as comparables or discounted free cash flow models depend on forecast revenue and earnings projections. I’m not sure these forward-looking projections are useful in an environment of such high uncertainty.

The average analyst projection sees Expedia recovering to 2019 levels over the next two years. For me, I want to see more concrete progress towards that goal as well as a reduction in uncertainty surrounding general travel demand.

In my view, Expedia shares are back to near pre-pandemic levels. Unfortunately, that’s with more shares outstanding, higher debt and a much more uncertain travel environment. For this reason, I’m going to skip the stock from Expedia right now. But I’m watching it closely, as I think it could present a good value investment opportunity once the company’s recovery trajectory becomes clearer.


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