Expedia Inc Falling 20 Percent Is an Overreaction

When online travel site Expedia, Inc (NASDAQ:EXPE) is the biggest travel company by gross bookings, is growing at twice the industry rate, and has an impressive 675 million monthly site visits. The nearly 20 percent drop of EXPE stock on Feb. 9 is hard to believe.

Higher costs earnings that missed consensus estimates sent the stock lower on the day. Yet Expedia’s revenue potential is vast and its effective use of resources will lead to a higher market share.

EXPE Stock Earnings in the Fourth Quarter

Expedia earned $0.84 a share on revenue of $2.32 billion. Though revenue climbed 11 percent year-on-year, regional brands offset the growth in its top brands: Brand Expedia, Hotels.com, Egencia and Expedia Affiliate Network.

Combined, the units grew 70 percent. Egencia’s $405 million worth of new business, topping results from the previous (third) quarter, brought its total signings to $1.4 billion for the year.

Instead of cheering Expedia for the investment paying off, the market is scrutinizing the higher expenses incurred in Q4.

The cost rise will not end there. The company hired the 95% of staff it needed to grow in the local markets. Expedia did not say which markets they are but promised that new products and features will increase its growth rates.

Slowdown in Revenue Misunderstood

Expedia reported gross bookings increasing by 14% but revenue growth fell to 11 percent. The drop is attributed to HomeAway transitioning from a subscription to a transaction-based model. The short-term hit on EBITDA (which fell 9 percent) is necessary costs that will pay off in the long-run.

For example, Expedia is migrating its computing tools to the cloud and hiring more staff to support its lodging supply and content teams. Headcount increases at HomeAway added to the higher costs.

G&A (general and administrative), due to the scaling up of Trivago and HomeAway, along with SilverAil, added to the higher costs.

Valuation and Outlook for EXPE Stock

Even though stock price fell by one-fifth, EXPE stock is even more compelling because the long-term growth prospects are better than ever. The forward P/E of 23 times and the PEG of over 3 times may deter value investors.

The company will need to prove to the markets that its investments are paying off. Provided that world traveling does not fall this year, investors may justify the high price multiples.

Expedia forecast EBITDA growth of 6 percent to 11 percent. This is slightly low for a company trading at a ~ 50x P/E. Furthermore, management forecast much of the growth will come in the second half of this year.

Given that growth is back-end loaded, markets will fret over Expedia’s short-term prospects.

Assuming the $170 million in expected investments in cloud computing pays off, the growth of up to 11 percent is achievable. Accelerated growth of HomeAway may offset the weakness in its other division.

Since Expedia’s growth rates are fairly consistent, an Earnings Power Value model from finbox.io would imply the stock is fairly valued (click on link to enter your own assumptions).

Takeaway on EXPE Stock

If Expedia is trading close to its fair value, investors may not be compelled to buy the stock at this time. But the global economy is strong and travel demand will likely go up as a result.

The bigger the market gets, the higher the potential that Expedia’s investments in the business will pay off fairly soon. If that happens, EXPE stock will recover from the 20 percent drop.

Disclosure: Author has no position in the stocks mentioned.

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