scyther5
scyther5
Expedia (NASDAQ:EXPE) has been a huge beneficiary of the surge in travel demand that it witnessed as the world emerged from the Omicron phases of the COVID pandemic. As the world opened up in mid-2022, the travel business boomed, and Expedia's online travel business was positioned to benefit from surging trends.
This was also seen in the performance of the stock last year, which was up 73% in FY23 as compared to the S&P 500 index, which was up 24% in the same period. Part of last year's performance in Expedia was also fueled by a fantastic Q3 report last year, with the stock recording gains after its solid Q3 performance as management mentioned they saw solid demand.
Expedia beats the S&P 500 in FY23 but an earnings miss has investors reevaluating its growth (Seeking Alpha)
Expedia's latest Q4 FY23 earnings report, however, threw a few surprises that caught me off guard, including a sudden CEO transition. These announcements indicate the company has embarked on a new chapter of its evolution, which, per my review below, holds promise but is not enough for me to change my neutral stance on the company.
On the whole, Expedia's vast online travel platform business has not had any material changes. Lodging continues to be a major revenue driver for Expedia. In fact, the company's lodging business has grown, now accounting for 80% of Expedia's revenue versus pre-pandemic, where lodging accounted for 70% of Expedia's revenue, per annual filings. Hotels still drive the majority of the revenue in lodging, but Expedia has made active efforts to grow its Vrbo business, including spending on ads and marketing to aid in its boost.
All of Expedia's online properties (Company sources)
Expedia operates in a couple of business model formats, similar to its peer Booking (BKNG). In both agency and merchant model formats, the company's platform continues to facilitate the transaction between traveler and travel provider. Except, while in the agency format, Expedia allows the travel provider to collect all travel fees while taking a cut of the fee later, in the merchant format Expedia collects revenue upfront while actually facilitating the end-to-end transaction.
From previous earnings calls, I noticed that Expedia has signaled its intent to focus more on the merchant format recently since this generates more margin and is growing faster than its agency model. In addition, the merchant model of operation is more closely aligned with Expedia's goals of expanding its Expedia for Business proposition.
Expedia's merchant-based business model grows faster than its agency-based business model (FY23 10-K, Expedia)
The company has also been actively working on upgrading its entire backend technology platform to migrate to newer technologies and merge all of Expedia's online travel platforms into one unified backend technology system.
After reporting a strong Q3, consensus estimates for Expedia's gross bookings projected the company to report an increase of 7.3% versus Q4 FY22. Unfortunately, the company reported that Q4 FY23 Gross Bookings grew 6% to $21.7 billion. Then, the company went further to throw some caution to the wind, pointing out some headwinds in Q1 FY23 attributing them to "continued pressure in air due to reduced pricing levels from increased capacity and the grounding of the Boeing fleet, as well as some pressure in our Vrbo brand."
For the full year, Expedia's gross bookings grew 10% to $104 billion, a marked decrease from the 31% annual growth the company witnessed in FY22. These comments are important to factor in, in my opinion, because travel bookings tend to be seasonal. Most people end up planning and booking their travel in the first two quarters of the year, which skews the revenue gains for most travel companies, including Expedia, towards the first half of the year.
On the brighter side, the company's B2B business continued to demonstrate some strong signs of growth. Yes, the growth in this segment is receding, but for the business to continue to grow by 33% in FY23 is still meaningful for the company. From the table I have added below, Expedia's B2B business grew at a compounded growth rate of ~52% since FY21, far outpacing the 22% total revenue growth for the company over the same time period.
Expedia's B2B revenue segment far outpaces the growth of the company's B2C segment and its overall business (FY23 10-K, Expedia)
Since the pandemic, Expedia has been able to navigate the choppy waters of post-pandemic distortions by leaning into its B2B business. The main value proposition of the B2B business was to partner with a wide range of travel and non-travel-related companies, including airlines, offline travel agents, online retailers, corporate travel management, and financial institutions, who used Expedia's underlying travel technology to market travel packages and rates to their travelers.
Per my observation, the company has been able to scale the B2B business sustainably by growing not only its revenue but also expanding its EBITDA margins, as can be seen below.
Expedia's B2B segment adjusted EBITDA margins expanded significantly (FY23 10-K, Expedia)
From the table above, the company's B2B segment adjusted EBITDA margins expanded significantly from 7.5% in FY21 to 23.6% in FY23, beating the company's overall adjusted EBITDA margins and almost at par with Expedia's B2C adjusted margins of 25.5%. I do believe that the scale of growth and margin expansion here have been quite impressive.
These reasons may have been enough for the company to announce a CEO transition last month from the much-loved Peter Kern to the incoming Ariane Gorin. The CEO announcement also appeared to shock investors, which may weigh on the stock's performance for a few months. Gorin has led Expedia's B2B business impressively through a period of extreme uncertainty in the pandemic, which could possibly explain her promotion to the CEO's chair. While I do not doubt the CEO's abilities, I would have personally preferred the company to announce a longer transition plan since it seems like Gorin will take over as CEO in the next two months.
Expedia is currently trading at ~11 times forward earnings, as per consensus estimates. The levels at which it is trading look cheap when compared to some of its peers, as seen in the chart below. At these levels, Expedia's valuation looks quite attractive for an investor to pass on this opportunity.
Expedia's forward-looking valuation as compared to its peers (YCharts)
Further, the company's valuation looks very reasonable when compared to the consensus expectations of the broader market. Consensus expectations peg Expedia's EPS to grow by ~28% this year, while sales are expected to grow by ~9%. Contrast that with the 11% EPS growth and 5% revenue growth expected in the S&P 500. There is clearly some heightened level of skepticism investors are showing toward Expedia and its new direction of growth under a new CEO who does not have any history of leading a public company yet.
I expect the stock to move sideways for a few months or range-bound as investors take more time to digest the range of changes at Expedia.
The online travel platform market is heavily contested by multiple players in the space, as well as many smaller travel platforms that operate similar to the booking platforms that Expedia provides. By site visits, Booking is the largest travel platform, followed by Tripadvisor (TRIP), Airbnb (ABNB), and Expedia. The market for lodging, however, is even more hotly contested, with most of Expedia's peers competing to grow the supply of lodging available on their websites. It is crucial for Expedia to continue to grow its supply of lodgings on its website so as to offer travelers more options to choose from at a compelling price point; otherwise, travelers will quickly navigate to a peer travel platform, hurting Expedia's revenue prospects.
On a broader macro level, the management of Expedia and its peers indicates travel will continue to meaningfully grow, but not at the pace witnessed in the past two years. A separate study by Deloitte shows travel demand will continue to expand in FY24.
Moving on to the more inherent risks of the company, I have already pointed out the CEO transition plan, which may cause some uncertainty in the mid-term.
The company also maintains a moderately higher debt profile, carrying about $6.6 billion in the form of senior notes in addition to the lease obligations. The company is actively making efforts to reduce its gross leverage ratio to its target of 2x from the current 2.3x, as noted on its earnings call.
After reviewing Expedia, I believe Expedia's stock is cheaply valued, but there may be reasons to warrant the relative discount in premiums for now. The sudden CEO transition plan and management's commentary about their Q1 FY23 expectations might have me on the sidelines for now, but the company's focus on growing its B2B business may have some hope. I rate Expedia as a Hold for now.