Expedia Group: Recovery Highly Dependent on Renewed Appetite for Hotel Bookings (NASDAQ: EXPE)

Investment Thesis: Expedia could have a longer-term upside if we see a broad-based recovery in hotel booking demand. However, I believe the stock price has rallied too quickly as investors continue to bet on a quick rebound in the sector. For this reason, I am neutral on the title for the moment.

Expedia Group (EXPE), like many companies in its industry, experienced a sharp decline in March 2020 as a result of COVID-19, before seeing a strong stock rebound.

Source: invest.com

Recent performances

For the most recent trimestergross bookings and revenue naturally fell sharply compared to the same period in 2019:

Source: Expedia Group Third Quarter 2020 Results

Despite the strain of the COVID-19 pandemic on the travel industry, one indicator of resilience has been the ability of the biggest players in this industry to save money and ride out the crisis.

Expedia has also managed to conserve cash. When we look at the company’s balance sheet for the last financial quarter, we see that cash and cash equivalents are up 31% compared to December 2019:

Source: Expedia Group Third Quarter 2020 Results

At the same time, the company’s long-term debt also nearly doubled during this period:

Source: Expedia Group Third Quarter 2020 Results

Given that the travel industry’s woes have been uniquely affected by COVID-19, attempting to rate Expedia by revenue would not make sense at this point.

Source: ycharts.com

For example, we see that the company has a negative EBITDA (earnings before interest, taxes, depreciation and amortization) with a high EV/EBITDA ratio. This essentially means the stock is trading at a high premium to its earnings, indicating that investors are betting big on a travel rebound.

Once we see an increase in earnings, the company’s value on an earnings basis would return to a much more reasonable level.

Expedia is one of the biggest players in the online travel industry. For comparison, Expedia currently has a market capitalization of $19.90 billion compared to $4.50 billion for TripAdvisor (TRIP) at the time of writing.

Additionally, where companies such as TripAdvisor act more as a review and information site, Expedia is much more involved in directly facilitating travel bookings. For example, in Q3 2020, Expedia saw accommodation make up 82% of global revenue, with advertising and media making up 6%, air travel 2%, and the remaining 10% made up of other revenue segments.

This means that much of the company’s fortunes are directly tied to how quickly housing booking demand rebounds.

For this reason, I believe that looking at the online travel market holistically, Expedia potentially has one of the highest advantages over its peers if this segment of the market rebounds faster than expected. On the other hand, Expedia is more exposed to larger losses if hotel booking demand remains subdued.

Risks

A key consideration for companies in this sector has been to conserve cash to deal with the drop in business due to the pandemic. However, this turned out to be a double-edged sword for several companies, including Expedia.

For example, criticism has grown among customers of airlines in particular, some of which have not offered passengers refunds, even as COVID-19 has led to broad travel restrictions.

Refund processes are particularly complicated when an “intermediary” is involved. For example, if a customer books a flight or hotel with an airline through an online travel agency, this agency needs the airline or hotel to approve a refund so it can be issued.

This process can cause significant delays and customers may be more reluctant to book through an agency and prefer to book direct instead.

Expedia, as well as several airlines, are facing legal action on allegations that customers were not reimbursed fairly in the circumstances.

In this regard, it is entirely possible that online travel agencies will be viewed differently as travel resumes post-pandemic – customers may prefer to book directly with a company and minimize the risk of not being reimbursed by case of unforeseen events.

Certainly, although Expedia offers many cheaper, non-refundable fares across its offerings, we can see a scenario where customers are more willing to book directly at a higher price to get a refundable option.

That said, we could also see the opposite scenario playing out. Due to the economic effects of the COVID-19 pandemic, consumers may be more price sensitive when researching travel options and may be more willing to book a non-refundable option at a cheaper price.

Conclusion

The online travel industry remains highly uncertain due to COVID-19, and the pace of recovery in this industry remains to be seen.

Given Expedia’s size and influence relative to many of its competitors, it may be able to recover faster than its peers if hotel booking demand picks up faster than expected. However, the company could also be at greater downside risk if the rally drags on.

As mentioned at the start of this article, Expedia – like other stocks in its industry – has seen a rapid rally in share price due to optimism that the sector will soon rebound. Therefore, I believe that the stock’s potential downside is greater than the current upside.

With COVID-19 cases continuing to rise around the world, recovery is likely to take longer than expected. The market may realize this when the next results are published in February. If we saw the stock consolidating in the pre-November $90-100 range, my view is that the stock would represent better value at this point.

Additional disclosure: This article is written “as is” and without warranty. The content represents my opinion only and does not constitute professional investment advice. It is the reader’s responsibility to exercise due diligence and seek investment advice from a licensed professional before making any investment decision.

Comments are closed.