Pick Expedia Stock Over Airbnb?

We think that online travel booking major Expedia’s (NASDAQ:EXPE) stock is a better pick compared to vacation rental platform Airbnb (NASDAQ: ABNB) at the present time. Airbnb stock has jumped 3x since its IPO in early December 2020 and is valued at about $130 billion or about 28x forward revenues. In comparison, Expedia is valued at just $21 billion or less than 3x projected 2021 revenue. Is the sizable difference in valuation justified? We don’t think so. Airbnb stock has seen much interest following its IPO, given its asset-light business model, sizable addressable market, and the fact that the vacation rental market held up better compared to other travel segments such as flights and hotels through Covid-19. On the other hand, Expedia stock has also recovered from its March 2020 lows to pre-pandemic levels, driven by optimism surrounding the vaccine and expectations of pent up demand for travel post-Covid-19. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at revenue growth as well as operating margins. See our interactive analysis on Airbnb vs. Expedia: ABNB stock looks highly overvalued compared to EXPE stock for more details.

Overview Of The Business

Airbnb connects people who want to rent out their homes or spare rooms with people who are looking for accommodations and makes money primarily by charging the guest as well as the host involved in the booking a separate service fee. Expedia operates online travel portals such as expedia.com and hotels.com, which help connect travelers with travel suppliers, such as hotels, airlines, cruises, and car rental companies.

Revenue Growth

Airbnb’s historical growth has been higher, with revenue growing at about 42% CAGR over the three years prior to the pandemic, compared to about 11% for Expedia. While both companies have faced setbacks due to Covid-19, the vacation rental market that Airbnb operates in has held up better compared to travel segments such as hotels and flights. This is partly due to the fact that people opted for more long-term stays with a focus on leisure, compared to hotels which are often more business-focused. Considering this, Expedia saw revenue decline by about 57% to $5.2 billion in 2020, while Airbnb’s revenue is likely to decline 32% year-over-year to about $4.5 billion per consensus (the company reports earnings next week).  Now, with Covid-19 vaccines being rolled out, and Covid-19 cases declining in the U.S and other developed countries, the travel market should start opening up. Expedia is expected to see a stronger rebound this year compared to Airbnb, given its more diverse offerings and its larger revenue decline through the pandemic. Per consensus estimates, Expedia’s revenues are expected to rise to about $8 billion in 2021, compared to around $4.5 billion for Airbnb.

Operating Margins Growth

Expedia’s operating margins stood at about 7.5% in 2019, compared to Airbnb which just about broke even. However, Airbnb’s margins had been improving prior to the pandemic, compared to Expedia’s margins which have faced pressure, due to competition and higher advertising and marketing-related costs. Although both companies should benefit from the recent cost reductions that they made through the pandemic, it’s likely that Airbnb will have a slight edge in terms of margins in the long-run.

The Net of It All

Although Airbnb has posted stronger revenue growth compared to Expedia prior to Covid-19 and is likely to do so in the medium-term, Expedia is likely to see a sharper rebound over this year. As this recovery is confirmed in the company’s quarterly reports, Expedia stock could also see gains. There could be even more upside from Expedia’s own vacation rental offering Vrbo, which has been a relative bright spot for the company through Covid-19. For example, the company says that revenue per room night for Vrbo was higher than it was for the rest of its lodging business. Now given Airbnb’s stellar market debut and premium valuation, we believe Vrbo could also drive Expedia’s stock. Although the company didn’t break out detailed financials for Vrbo in 2020, revenue stood at about $1.3 billion in 2019. Even if we assign a relatively conservative 15x revenue multiple to this, it would value the Vrbo business alone at almost $20 billion – close to Expedia’s entire market cap. Expedia could unlock a lot of value from Vrbo with more transparent financial disclosures or possibly by spinning the business off into a separate entity, down the road.

Overall, we believe that Expedia stock looks like a better bet compared to Airbnb at this juncture, given its lower valuation, the possibility of a stronger recovery in revenue over 2021, and the potential upside from its Vrbo business. We think that the difference in P/S multiple of 28x for Airbnb versus under 3x for Expedia will likely narrow going forward, implying better returns for Expedia stock.

While Expedia looks like a better pick versus Airbnb, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Adobe vs. Corcept Therapeutics shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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