The US markets are currently under significant pressure from several factors, including slowing growth, declining corporate earnings, persistent inflation, and increasing interest rates. The recent Silicon Valley Bank fiasco has only added to the likelihood that markets will experience more downside over the next few months. However, for long-term investors with a 3-5 year horizon, this situation presents an opportunity to accumulate quality stocks at bargain prices amidst the market volatility.
One such stock that investors can consider accumulating over the next few months is Expedia, a Nasdaq-listed online travel agency. With a one-year forward PE of 10 times and EV/EBITDA of 6.6 times (Bloomberg consensus estimates), the stock’s valuation is quite attractive, especially given its status as one of the world’s largest and oldest OTA with decent growth prospects. Additionally, Expedia boasts a strong brand, wide global customer base, and a healthy balance sheet, which positions it well to weather the macroeconomic headwinds that may arise in the current or next year.
While the current valuation is attractive enough to buy now, we recommend that investors accumulate the shares over the next few months due to the broader market risks associated with macro pressures and economic uncertainty.
Founded over 25 years ago, Expedia was one of the first OTA’s to emerge globally when the internet revolution kickstarted. Thus it has been a key player in the transformation of the travel and leisure sector over the last two decades. The company’s core competency is built on its brands, platform and technology capabilities and supply portfolio. Expedia leverages this to provide travel and leisure solutions to business partners and empower travellers efficiently research, plan, book and enjoy their travel experience.
At the end of 2022, Expedia had approximately 3 million lodging properties available for booking on its platform. It also had listings from over 500 airlines, travel packages, rental cars, cruises, insurance as well as activities and experiences. Of the 3 million lodging properties listed, around 900,000 were from hotels. The larger pie of over 2 million comes from alternative accommodations under its Vrbo brand. Vrbo is one of the largest players in the short-term rental segment after Airbnb (which had over 6 million listings at the end of 2022).
Other key online brands of the company are Brand Expedia (full service online travel solutions – flights, accommodation, cars, packages, etc); Hotels.com, Orbitz, Travelocity, ebookers and Wotif Group.
Expedia has three operating segments by business type – Merchant Model (66 per cent of revenue), Agency Model (26 per cent) and Advertising Model (8 per cent). Under merchant model — which largely consists of lodging-related bookings — the company acts as the merchant of record and provides travellers access to hotel room reservations based on its contracts with suppliers. Under this model, Expedia receives the full money at the time of booking and later pays the supplier based on its contracts with them. Under the agency model, Expedia acts only as an agent in transaction and receives commissions or ticketing fees from the suppliers for each transaction. Majority of agency model revenue is from air ticket bookings. In the advertising model segment, Expedia offers travel and non-travel advertisers access to potential source of incremental traffic via visibility on its multiple web properties.
In terms of geographic segments, United States accounts for 68 per cent of revenue.
After reeling under the pandemic impact in 2020, when revenue declined by over 50 per cent, the company has seen a strong recovery by 2022.
For 2022, Expedia reported revenue of $11.7 billion, which was only marginally (3 per cent) below its 2019 (pre-pandemic year) revenue. EBITDA of $2.08 billion (margin at 17.8 per cent) and net profit of 697 (6 per cent) were inline versus 2019 numbers. Results would have been better if not for severe weather-related cancellations in Q4 of 2022. Prior to the impact of weather, expectations were for EBITDA (excluding fx impact) to exceed 2019 levels by mid-teens percentage.
However, what has worked in favour of the company is strong trends in travel and leisure post weather-related headwinds. At the time of its Q4 earnings release, the company updated on strong trends witnessed in January and its expectations for revenue to grow in double digits percentage and for margins to expand in 2023 (implying even better growth in earnings).
Risk versus opportunity
Just before the Covid impact in March 2020, Expedia stock was trading at around $120. Post touching lows of around $48 in March 2020, shares witnessed a multibagger rebound to above $200 by February 2022. This was in anticipation of rebound in travel and leisure as revenge spending took hold. While broadly travel and leisure trends have actually picked up and trending well as reflected in the company’s financials and 2023 outlook, the shares have, however, corrected to a little below $100 now. This dichotomy lies in fears of a recession in developed markets in 2023 or 2024. So while the company faces risk of recession impacting travel and leisure budgets, the stock appears to have already priced in the same. At valuation of 10 times one year forward PE, risks appear to be adequately reflected (ie if growth is lower than anticipated and forward earnings come short of expectations).
Expedia has a good balance sheet with comfortable cash and cash equivalents of around $4 billion, and positive free cash flows (FCF). In CY22, the company had (FCF) of close to $3 billion and has been FCF positive in each of the last ten years (except Covid-hit CY20). Thus, the company is well-positioned to tide through any economic slowdown. Considering the risk of a slowdown, it’s advisable to take a long-term perspective and investors can accumulate stocks over the next few months instead of buying them at one go.
The long-term opportunity continues to remain attractive. As per data in company filings, global travel spending is at around $1.6 trillion. Expedia’s gross bookings are still only at low single digit percentage (although its one of the largest players) of global travel spending, presenting a huge market opportunity for OTAs (including Expedia) to tap.
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