Expedia Stock Analysis & Deep Dive

A rare find: A healthy and growing business for an EV/FCF of only 6.6

Jun 22, 2023

I am sure that most of you know Expedia from bookings hotels or flights. Expedia Group is the second largest online travel agency behind Booking. Expedia is headquartered in Seattle, US and employs 16,500 people. Half of these employees work in technology related jobs.

Expedia Group Erfolgsgeschichte | UserTesting Erfolgsgeschichten

The company was founded as a division of Microsoft in 1996 and has since been in multiple hands, most recently IAC before the spin of in 2005. Expedia itself spun of Tripadvisor in 2011. Expedia Group owns the following booking portals: Expedia.com, Hotels.com, Vrbo, Travelocity, Hotwire.com, Orbitz, Ebookers, CheapTickets, CarRentals.com, Expedia Cruises, Wotif, and Trivago.

The focus of Expedia Group is on the top three portals, which are Expedia, Hotels.com and Vrbo. Expedia offers everything from rooms to flights and rental cars.

Hotels.com is focused (as the name already states) on hotels:

Vrbo (short for Vacation Rental By Owner) is similar to Airbnb in the sense, that it offers vacation rentals compared to standard hotel rooms. Just as Airbnb, Vrbo offers ordernary people an easy platform to rent out their property. The main difference is, that Vrbo focuses on listing only complete properties and not single rooms in a flat or apartment. According to some online reviews, Vrbo is cheaper and has better customer service than Airbnb. On Trustpilot, both companies have very bad reviews. Vrbo gets a score of 1.9 out of 5, while Airbnb only gets 1.3 out of 5.

The largest competitor is Booking, followed by Airbnb and Trip.com

The industry

Global travel is a great sector to be in. Historical growth (with the exception of Covid) has been and will be ca. 10% p.a. More and more purchasing is done online and companies such as Expedia are the big gainers of this trend. There is still a rebound effect of the Covid related lock downs and even though inflation is high, people don’t cut back on travel related spending. To quote the CEO:

“Overall, we are pleased to see broad travel demand remain strong in what appears to be a more structural post-pandemic environment of people prioritizing travel above most other categories of spend. This has held up despite inflation and recession worries and even more recently, bank system concerns. While economists continue to debate potential recession outcomes and clearly, many unknowns are still out there, consumers have so far shaken it off and continue to travel.”

The Business

Expedia’s business can be broken down into three parts:

Merchant Model: Customers book through Expedia their accommodation, airline seat or rental cars. Expedia does not bear any inventory risk since the room or rental car belongs to a third party. Customers usually pay upfront and Expedia acts as the merchant of record. This makes up the majority of the revenues with a 66% share.
Agency Model: This mostly applies to airline seats. Expedia acts as the agent and passes on the booking to the provider of the service. Expedia receives commissions and ticketing fees. This is about one quarter of the overall business.
Advertising Model: Expedia offers advertisers access to traffic through media and advertising offerings across several transaction-based websites. This adds 8% to the overall revenue.

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Similar to Bookings Genius loyalty program, Expedia will launch a new loyalty program in the US in July called OneKey. This loyalty program works across Expedia, Hotels.com and Vrbo. I can say for myself, that the Bookings Genius loyalty program is a reason why I book most of my travels directly through with Booking. Therefore I can fully understand Expedia’s claim “On average, our members book 2.5x more frequently and spend 2.7x more than non-members.”

On my last trip in Portugal, I used Expedia for the first time in a couple of years and was surprised that the offers on Expedia were sometimes a lot better than those on Booking. In total I booked half of my accommodations on Booking and the other half on Expedia. If Expedia delivers real value for the customers with OneKey, I will most certainly book more on Expedia.

Expedia migrated its Hotels.com platform to the Expedia tech stack last year. This had a drag on the performance in 2022 and was overcome in Q1/23. The same will be done to Vrbo. Afterwards all three major brands will share the same tech stack and the redundant efforts of keeping multiple tech stacks running will be reduced. These resources can than be applied in a more useful matter.

The Fundamentals

Expedia has been a success story. The revenue has been rising steadily every year until Covid, recovered fast and will reach a new record high in 2023:

At the same time, Expedia also posted strong earnings and even better: Really strong free cash flows. Covid had of course a strong impact. The combined free cash flow of 2021 and 2022 exceeded the outflow of 2020 by $1.2bn.

Due to the nature of the business model, customers pay Expedia usually upfront and start the journey at a later point in time. Therefore the cash flow is registered at the time of the sale and the revenue is only recognized, once the journey has been completed. Expedia’s free cash flow is strongest in Q1 due to the large bookings for the summer months, which usually happen earlier in the year. Therefore the FCF offers us a good outlook on the revenue and earnings numbers we can expect this year. Q1/23 had the highest free cash flow ever recorded.

The amount of booked room nights and air tickets in Q1/23 was significantly higher than any quarter in the previous two years. B2B business is continuing to excel and was 55% higher than in Q1/22.
Gross bookings of 29.4bn in Q1, up 20% compared to Q1/22. These gross bookings resulted in revenue of 2.7bn and a 9.1% revenue margin

Between January and April the company bought back shares worth $600m and the management has announced to continue doing so.

The balance sheet shows debt of $6.3bn. The CFO talked in the most recent earnings call about potential early retirement of some debt. The next due debt is a 6.25% senior note of $1.04bn due in May 2025. Since 2020 when long-term debt stood at $8.2bn, the company has already paid off $2bn in debt, while increasing the cash position by $1bn. This shows you how much cash the business is generating in non-pandemic times.

Expedia used to pay dividends until 2020 and currently has no plans to reinstate the dividends. I believe that this is the right approach and the focus should be on paying of the debt and buying back shares at the current low valuation.

The Management

Management at Expedia has not been stable to say the least. In 2017 Mark Okerstrom became the CEO of Expedia. Just two years later he resigned with the CFO due to differences with the board. Barry Diller the CEO and Chairman of IAC took over and Expedia cut 12% of its workforce in 2020. In April 2020 Peter Kern was assigned CEO and was the highest paid CEO in 2021 in the S&P500 with $296m.

Peter Kern has been a director of Expedia since the spin-off from IAC. He holds $14.3m in Expedia shares, while the CFO Julie Whalen who joined in 2022 holds $445k in Expedia stock.

I really like the statements made by the CFO in the most recent Q1/23 earnings call. It seems like they know how to allocate capital to earn the best return possible.

“And considering our ongoing strong liquidity and free cash flow, as long as we continue to believe that our stock remains undervalued and does not reflect our confidence in the long-term strength of the business, we plan to continue buying back our stock opportunistically throughout 2023.”

Valuation

You can see that Expedia and Booking shares followed a very similar path until 2022. While booking has reached a new all time high, Expedia is still far below the old heights.

Analysts expect earnings growth of more than 20% for the next two years. Currently Expedia is trading at an EV/FCF adjusted for SBC of 6.6. This does not (!) include the 1.2bn of long-term investments. These long-term investments include among others 14.5% of the stock-listed South-American travel company Despegar. This investment is worth about $69m at current market prices. Additionally Expedia owns 16% of stock-listed GBTG. This stake is worth $582m. These two investments are not part of the cash and short-term investments.

If we include these as well, then Expedia is valued at only an EV/FCF of 6.1.

Assuming 20% growth in the next 2 years gives us an EV/FCF of 5.5 for 2024 and 4.6 for 2025. Needless to say that these would represent hilariously low levels of valuation for a healthy, growing company.

Two more quotes from the CFO:

„Looking ahead, given the strength we continue to see in our business, we are reiterating our full year outlook of double-digit top line growth with margin expansion”

„In closing, 2023 is off to a great start, with record revenue and cash flow. The travel industry appears to be strong and growing, and our growth initiatives are gaining momentum. And all of this, we believe positions us well to drive long-term growth and shareholder returns.“

Given the fact that the management is rightfully buying back shares at these levels, the EPS and FCF/share will rise even faster in the future.

Summary

I believe that Expedia is strongly undervalued at this point. The companies has been in a side way trajectory for a couple of years and Covid had a strong impact. With the guidance and promising numbers I can easily see the shares reaching a new all time high. The forward P/E of 9 and an EV/FCF of 6.6 leave ample room for a multiple expansion.

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