Expedia Stock Fell 36% Year-To-Date, How Low Can It Go?

Despite almost a 36% decline in Expedia‘s (NASDAQ:EXPE) stock since the beginning of this year, at the current price of $71 per share (as of April 30th), we believe Expedia has a significant downside. The travel industry is facing an unprecedented crisis, driven by the demand shock caused by the coronavirus related lockdown. Expedia stock has underperformed the broader markets between 2017 and now. Expedia stock is down 39% since the end of 2017, a little over two years ago, as compared to an 8% growth for the S&P 500. Below, we outline a case that could see Expedia’s stock decline going forward due to structural adjustments in the market, causing the company’s stock to decline to levels of under $35 per share.

Our dashboard Expedia Downside: How Low Can Expedia Stock Go? provides the key numbers behind our thinking for the drop, and we explain more below. One of the contributors to Expedia’s stock price decline over the last two years has been the contraction of its P/E multiple, which, on a trailing basis, declined from about 46.9x at the end of 2017 to 28.1x at the end of 2019, and is 18.5x currently.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on Expedia’s business, due to its impact on the global economy. The global travel industry has been the worst hit during this pandemic. Expedia derives a majority of its revenues from the U.S. which has become the new epicenter of the coronavirus outbreak, with the country recording the largest numbers of COVID-19 cases across the globe. Many cities are under lockdown, and there is restricted movement of people. Even after the lockdown is lifted, people will likely avoid non-essential movement, which includes taking leisure trips. In fact, working from home has also become the norm for many people during the current pandemic, and this is likely to continue until a vaccine is developed and administered at scale. People could also refrain from taking business trips.

China, where the pandemic began, offers a glimpse into the future for the rest of the world. As China has been slowly lifting its restrictions on travel and movement early last month, there have been concerns of a rebound due to a steady rise of new infections especially coming from thousands of Chinese returning from abroad. A similar situation and concerns could be expected with all lockdown states and countries going forward.

We believe Expedia’s Q1 results in May will confirm the hit to its revenue. It is also likely to accompany a lower Q2 as-well-as full-year 2020 guidance. Specifically, we believe the full-year revenue expectations formed by the market at the time of May Q1 results may be closer to $9.7 billion – about 4% lower than its 2017 revenue of $10.1 billion, and a big 20% lower than the 2019 revenue of  $12.1 billion. Our dashboard shows key components of Expedia’s revenues.

The market isn’t going to stomach this well and Expedia’s P/E multiple is likely to shrink from the current 18.5x to about 17x. Separately, the sharp reduction in revenues will likely be accompanied by a reduction in operating expenses. This could imply a significant reduction in net income margin for the year from 4.7% in 2019 to about 3.1% in 2020.

Will such a price drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

You can also see how Booking Holdings is comparing with Expedia, in terms of dealing with the outbreak of COVID-19.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. 

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Expedia’s multinational peers, including Booking Holdings and TripAdvisor. The complete set of coronavirus impact and timing analyses is available here.

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