What Is Expedia’s Fair Value?

by Trefis Team
+3.63%
Upside
118
Market
123
Trefis
EXPE
Expedia
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Expedia (NASDAQ: EXPE) has delivered a strong performance so far this year, driven by robust gross bookings from both HomeAway and Egencia. In the first nine months of 2018, the company’s revenues grew 12% year-over-year (y-o-y) to $8.7 billion, driven by a 13% y-o-y growth in overall gross bookings. The top-line growth was also driven by significant growth across night rooms booked and increased air ticket revenues. In addition, Expedia’s adjusted EBITDA grew 14% during this period, largely due to the company’s efforts to optimize its direct marketing spend. Going forward, we expect the company to continue this top-line growth momentum, though its hiring and automation costs could pressure its bottom line.

Expedia’s stock price has been quite volatile and fluctuated between $102 and $134 since the beginning of this year. The stock is slightly down year-to-date despite strong financial results, largely due to its long-term growth concerns. We have maintained our price estimate for Expedia at $123, which is slightly ahead of the current market price. We have created an interactive dashboard on What Is Driving Our $123 Price Estimate For Expedia, which details our key forecasts and estimates for the company. You can modify the interactive charts in this dashboard to gauge the impact that changes in key drivers for Expedia can have on our price estimate.

Overview of Forecasts

Expedia has four reportable segments: Core OTA, Trivago, HomeAway and Egencia. The Core OTA (Online Travel Agency) segment provides a full range of travel and advertising services to the company’s customers through a variety of brands including Expedia, Hotels.com, Orbitz, CheapTickets, ebookers, Hotwire, Travelocity, Wotif Group and SilverRail Technologies. On the other hand, Trivago generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites. Expedia’s HomeAway segment operates an online marketplace for the vacation rental industry, while Egencia provides managed travel services to corporate customers worldwide.

Looking at full-year 2018, we expect Expedia to generate around $11.2 billion in revenues and adjusted earnings of around $360 million. Our revenue forecast represents year-on-year growth of nearly 12%. Of the total expected revenues in 2018, we forecast $8.6 billion in revenues for the core OTA business, nearly $1.3 billion for the HomeAway business, over $820 million for Trivago, and nearly $560 million for Egencia. We estimate a take rate of around 11% for 2018, which is similar to the figure for the past few years. This, combined with a gross booking forecast of $78.5 billion, should help generate OTA revenue of $8.6 billion in 2018.

Expedia has managed to drive growth through a series of acquisitions. Recently, it acquired Pillow and ApartmentJet, with a focus to deploy its capital strategically to enhance shareholder returns. This is expected to add a unique software platform which will lay the foundation for HomeAway and Expedia Group’s urban expansion efforts in the coming years. The company is also aggressively investing to migrate to cloud computing systems to cut costs and improve marketing to better compete with rivals such as Booking Holdings (NASDAQ: BKNG). However, the company has lowered its expectations for spending on the cloud to about $150 million in 2018 from its earlier forecast of below $170 million. That said, management also emphasized that the cloud expenses could exceed $250 million in 2019. Further, the company aims to double its gross bookings by the end of this year by leveraging its data-driven approach to marketing optimization, while continuing to aggressively drive its global expansion plans. We expect this to drive the company’s value in the near term.

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