Expedia Stock Up 2x, Time To Sell?

Expedia’s stock (NASDAQ: EXPE), a travel company providing everything from airline tickets, hotel rooms, car rentals, to cruises, has gained almost 2x – moving from about $83 to $160 currently – in the last twelve months. However, Expedia’s revenues have fallen 64% to a consolidated figure of $4.2 Bil for the last four quarters from the consolidated figure of $11.7 Bil for the four-quarter period previously. While this revenue and stock price mismatch looks like a reason to sell the stock – as EXPE stock remains highly valued at a price-to-sales ratio of 4.2x (given that Expedia’s P/S was around 1.5x during the 2018-2019 period), we still believe that the company’s current P/S multiple can still see a further upward movement in the short to medium term. This is based on the travel company’s slightly improved results in Q1 and initiatives to simplify the brand. Our dashboard, What Factors Drove 42% Change in Expedia’s Stock Between Fiscal 2018 and Now? provides the key numbers behind our thinking, and we explain more below.

Expedia saw a slower decline in retail reflecting improvements in leisure travel trends in Q1, particularly in North America. In addition, it saw a 10% increase in revenue per room night in Q1, as it benefited from an increase in the percentage of alternative accommodation (Vrbo) stayed room nights, which have a higher revenue per room night. Although Expedia does not break out Vrbo numbers, the company’s management reported that it benefited from its vacation rental business and domestic business in the U.S.  Covid-19-related restrictions have relatively eased in the U.S., which accounts for 67% of its total Expedia revenues – signaling an improving trend going forward. While Expedia still has a long way to grow its operating metrics similar to 2019 levels, mass vaccinations are definitely helping the travel industry to recover. The company has noticed encouraging trends in countries where vaccine distribution is being organized successfully (the UK, U.S., and Israel), except in Asia, where vaccine distribution is rather slow. To add to this, Expedia also announced its intention to sell its corporate business arm, Egencia, to focus better on its core technology and B2B business. This sell-off is a part of Expedia’s move to further streamline operations.

Expedia’s stock grew 18% from around $113 at the end of fiscal 2018 to around $132 at the end of fiscal 2020. While the company’s revenue per share declined a sizeable 50% during this period – thanks to the pandemic restrictions, the company’s stock price climbed at the end of fiscal 2020 on the optimism of vaccine trial news. It should also be noted that Expedia’s P/S was around 1.5x during the 2018-2019 period. It appeared higher in 2020 as the reported drop in RPS led the P/S ratio to appear higher at that point. The company’s P/S ratio grew from about 1.5x at the end of FY 2018 to 3.5x at the end of FY 2020. While the company’s P/S is about 4x now, we expect this figure to grow modestly going forward.

How Is Coronavirus Impacting Expedia’s Stock?

Expedia’s total revenue in the first quarter of 2021 decreased 44% y-o-y to $1.2 billion, with the group’s retail segment revenue declining 35% and its B2B segment’s revenue falling 62%. To break this further, lodging made up 72%, advertising and media accounted for 7%, air accounted for just 4% of total revenues, and the rest came from other services. On the bottom line, the company reported earnings at a loss of $4.17 in Q1 as compared to a loss of $9.24 in the same period last year.

In the long term, Expedia needs to address its $4.6 billion negative free cash flow in 2020 that compares to $1.6 billion in positive free cash flow the previous year. So, it needs to generate at least $6 billion to return to normalcy, of which it totaled $2 billion in Q1. While Expedia still has $4.3 billion in unrestricted cash and short-term investments and $2 billion in an untapped revolver capacity, reducing its large debt of $8.5 billion will rely heavily on the company’s post-pandemic recovery.

It is helpful to see how peers stack up. EXPE Stock Comparison With Peers for how Expedia compares against peers on metrics that matter.

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