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INTRINSIC VALUE ASSESSMENT OF
EXPEDIA, INC. (EXPE)
JANUARY 13, 2019 This article was written with Stephen Barnes from The Investor’s Podcast
IntroductionExpedia,Inc.isanonlinetravelcompanythatprovidesleisuretravelersandbusinesseswiththetechnology,tools,andinformationtheyneedtoplan,book,andexperiencetravel.Expediaownsandcontrolsabroadportfoliooftravelbrandsandistheworld’slargesttravelagencybybookings.
Expediaderivesthemajorityofitsrevenuesfromlodgingandaccommodationsservices(68%ofsalesin2017).Theremainderofitsrevenuesisderivedfromservicesforairtickets(8%),rentalcars,cruises,in-destination,andothers(13%),andadvertising(11%).
TravelsuppliersdistributeandmarketproductsviaExpedia’sdesktopandmobileofferings(apps),aswellasthroughalternativedistributionchannels,andExpedia’sprivatelabelbusiness.Expediaalsooperatesanadvertisingandmediabusinessthathelpsotherbusinesses,mainlytravelproviders,reachalargeaudienceoftravelersaroundtheglobe.
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
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INTRINSIC VALUE ASSESSMENT OF
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Expedia’sportfolioofbrandsandbusinessesincludethefollowing,amongothers:
• Expedia.com®,aleadingfull-serviceonlinetravelcompanywithlocalizedwebsitesin33countries;• Hotels.com®,aleadinggloballodgingexpertoperating90localizedwebsitesin41languageswithan
award-winningloyaltyprogram(booktennights,getonefree);• Expedia®AffiliateNetwork,aglobalB2Bbrandthatpowersthehotelbusinessofhundredsofleading
airlines,travelagencies,loyalty,andcorporatetravelcompaniesplusseveraltopconsumerbrandsthroughitsAPIandtemplatesolutions;
• trivago®,aleadingonlinehotelmetasearchplatformwithwebsitesin55countriesworldwide;• HomeAway®,aglobalonlinemarketplaceforthevacationrentalindustrywithnearly1.8million
onlinebookablevacationrentallistings,whichalsoincludestheVRBO,VacationRentals.com,andBedandBreakfast.combrands,amongothers.Thesebrandscompetewiththepopularandfast-growingAirbnb.Inadditiontoitsonlinemarketplace,HomeAwayalsoofferssoftwaresolutionstopropertymanagersthroughitsHomeAwaySoftwareandGladtoHaveYouproducts.OnOctober25,2018,ExpediaalsoannouncedtheacquisitionofPillowandApartmentJet,whichwillbefoldedintoHomeAwayportfolioofcompanies;
• Egencia®,aleadingcorporatetravelmanagementcompany;• Orbitz®andCheapTickets®,leadingU.S.travelwebsites,aswellasebookers®,afull-servicetravel
brandwithwebsitesinsevenEuropeancountries;• Travelocity®,aleadingonlinetravelbrandintheUnitedStatesandCanada;• Hotwire®,aleadingonlinetravelwebsiteofferingspontaneoustraveldeals;• Expedia®MediaSolutions,theadvertisingsalesdivisionofExpedia,Inc.thatbuildscreativemedia
partnershipsandenablesbrandadvertiserstotargetahighly-qualifiedaudienceoftravelconsumers;
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
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INTRINSIC VALUE ASSESSMENT OF
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TheCompany’scurrentmarketcapisabout$17.01Billion,anditsenterprisevalue(i.e.,marketcap+totaldebtnetofcash)isapproximately$18.77Billion.Duringthemostrecenttwelve-monthperiod,itgenerated$15.7Billioninsalesand$1.2Billioninleveredfreecashflow(i.e.,afterinterestexpense),or$1.5billioninunleveredfreecashflow(i.e.,beforeinterestexpense).Thecompany’scommonstockhasfluctuatedbetweenahighof$139.77andalowof$98.52overthepast52weeksandcurrentlystandsataround$114.56.IsExpediaundervaluedatthecurrentprice?
The Intrinsic Value of Expedia, Inc.TodeterminetheintrinsicvalueofExpedia,we’llstartbylookingatthecompany’shistoricalfreecashflow.Acompany’sfreecashflowisthetrueearningswhichmanagementcaneitherreinvestforgrowthordistributebacktoshareholdersintheformofdividendsandsharebuybacks.BelowisachartofExpedia’sfreecashflowforthepasttenyears.
Asonecanseefromthechartabove,thecompany’sfreecashflowhasgrownoverthelasttenyears,from$361millionin2008to$1.2billioninthetwelve-monthperiodthroughSeptember2018.Inotherwords,freecashflowgrewatacompoundannualgrowthrate(CAGR)of12.76%overthepasttenyears.
TodetermineExpedia’intrinsicvalue,anestimatemustbemadeofitspotentialfuturefreecashflows.Tohelpusbuildthisestimate,wehavecalculatedanddisplayedanarrayofpotentialoutcomesforfuturefreecashflowsbelow.
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INTRINSIC VALUE ASSESSMENT OF
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Whenexaminingthearrayoflinesmovingintothefuture,eachonerepresentsacertainprobabilityofoccurrence.Theupper-boundlinerepresentsa12%growthratewhichisslightlylessthanthe12.76%compoundedannualgrowthrate(CAGR)achievedoverthepasttenyears.This12%growthratehasbeenassigneda30%probabilityofoccurrenceasitiscertainlypossible,butperhapsnotthemostplausiblescenariosincecompaniestypicallygrowslowerandslowerastheymatureandasrevenuesgetlarger.However,inExpedia’scase,threefactorsargueinfavorofa12%growthrate.
First,themarketinwhichitcompetesishuge.Theglobaltravelmarketwasestimatedtobeabout$1.6trillionin2018,andtheonlinetravelsegmentofthatmarketisstilllessthanhalf(44%oftheglobaltravelmarket)andevenasmallerpercentageoutsidetheU.S.(7%inEMEA,6%inLATAM,and5%inAPAC).
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
Second,duringthefive-yearperiodfrom2013through2017,revenuegrewataCAGRof22%whileAdjustedEBITDA(somewhatofaproxyforcashflow)grewataCAGRof18%.
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
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Third,certaincapitalexpenditures,suchasdatacenterinvestments,areshrinkingasExpediamigratestothecloud.
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
Toaccountforanumberoffactorsincludingfiercecompetitionandpromotionalactivityamongbrandedfoodmanufacturersandprivate-labelproductsasretailersconsolidate,offsetsomewhatbypotentialrevenueandearningsincreasesfromfutureacquisitions.
Themiddlegrowthlinerepresentsa7%growthratetoaccountforanumberoffactorsincludingfiercecompetitionintheonlinetravelspaceandtheplausibilityofslowingglobaleconomicgrowthand/orarecessioninthenearterm.Expedia’scompetitorsincludewell-capitalizedonlineandofflinetravelcompanies,largeonlineportalsandsearchwebsites,certaintravelmetasearchwebsites,mobiletravelapplications,socialmediawebsites,aswellastraditionalconsumere-Commerceandgroupbuyingwebsites.Themiddlegrowthscenariohasbeenassigneda60%probabilityofoccurrence,asitismostlikelytooccur.
Thelowerboundlinerepresentsa3%growthrateinfreecashflowandassumesthatthecompanywillgrowataboutthesamerateasthe10-YearTreasuryNote,whichisagoodproxyforprojectedGDPgrowth(i.e.,thegrowthoftheoveralleconomy)overthenexttenyears.Expediaisverylikelytogrowatleastasfastastheoveralleconomy.Thisscenariohasbeenassignedonlya10%probability,asthecompanywillmostlikelygrowmuchfasterthantheoveralleconomygiventhevastmarketinwhichitcompetesandtheglobaltrendfromofflinetoonlinebookings.
Assumingthesepotentialoutcomesandcorrespondingcashflowsareaccuratelyrepresented,Expediamightbepricedtogeneratea9.4%annualreturnifthecompanycanbepurchasedattoday’spriceof$117.Let’snowtakealookatanothervaluationmetrictoseeifitcorrespondswiththisestimate.
BasedonExpedia’scurrentearningsyield,whichistheinverseofitsEV/EBITratio,thecompanyiscurrentlyyielding4.5%.ThisisbelowtheConsumerDiscretionarySectormedianaverageof7.6%suggestingthatthecompanymaybeovervaluedonacomparablebasis.However,ExpediahasacurrentEV/LTMFreeCashFlowyieldof7.1%.ThisisabovetheConsumerDiscretionarySectormedianaverageof5.3%suggestingthatthecompanymaybeundervaluedonacomparablebasis.Finally,we’lllookatExpedia’sfreecashflowyield,a
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metricwhichassumeszerogrowthandsimplymeasuresthefirm’strailingfreecashagainstitscurrentmarketpriceormarketcapitalization.Atthecurrentmarketprice,Expediahasafreecashflowyieldof6.9%comparedto5%fortheConsumerDiscretionarySector.
Takingallthesepointsintoconsideration,itseemsreasonabletoassumethatExpediaiscurrentlytradingatadiscounttofairvalue.Furthermore,thecompanymayreturnaround9.4%annuallyatthecurrentpriceiftheestimatedfreecashflowsareachieved.Now,let’sdiscusshowandwhytheseestimatedfreecashflowscouldbeachieved.
The Competitive Advantage of Expedia, Inc.Expediahasvariouscompetitiveadvantagesoutlinedbelow.
• BrandValue.OneofExpedia’smostpowerfulcompetitiveadvantagesisitsportfolioofrecognizablebrands.Expediasellsitstravelofferingsundernumerousleadingandtrustedbrands(seethelistofbrandsintheintroductionsectionabove).Expediacanleveragethesebrandstogarnertrustwithcustomerswhenmakinglargetravelpurchases.
Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
ForacompetitortochallengeExpedia’scompetitivebrandposition,theywouldhavetodeployalargeamountofcapitalandresourcesonadvertising,customerservice,anddistribution.Infact,in2017,Expediaspent$4.36billionondirectsellingandmarketingactivities.
• StrongNetworkEffects.Expediahasbuiltandcontinuestobuild,abroadnetworkoftravelofferings.Onthesupplyside,asofSeptember30,2018,thecoreExpediaplatformexhibited895,000properties,andHomeAwaysportednearly1.8millionbookablelistings.Onthedemandside,asmeasuredbyAppAnnieonOctober25,2018,Expedia'scoreplatformranksasatop-10journeyiOSmobileapplicationin17countriesversus118forBooking.com,and25forTripAdvisor.
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INTRINSIC VALUE ASSESSMENT OF
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Source:ExpediaInc.,InvestorPresentationofFebruary8,2018
ThisstrongnetworkeffecthasledExpediatobecomeoneoftwodominantplayersintheglobalonlinetravelagencybookingmarket—theotherplayerbeingBookingHoldings(formerlyknownasPriceline).ExpediaandBookingeachhaveabout35%shareintheglobalonlinetravelagencybookingmarket.Thenumberthreeplayer,Orbitz,wasacquiredbyExpediain2014.BeneathExpediaandBooking,marketshareishighlyfragmented,makingitveryhardforsmallerplayerstogaincustomertrafficandsupplierscale.Smallerplayerswouldneedtoexpendlargeamountsofcapitalandsubstantialhumancapitaltobuildrelationshipswithhotelsandgathercriticalaccommodationinformation,includingpictures,justtogetstarted.Then,toattractcustomers,theywouldneedtospendheavilyonadvertisingtoattractcustomerstotheirapporwebsite(asmentioned,Expediaspentover$4.3billionor43%ofrevenueondirectmarketingin2017).Andevenifasmallerplayermanagedtoattractafewcustomers,itwouldneedtobuildoutITsystems,datacenters,anda24/7customersupportteamtoretainthem.Notaneasytask!
• SwitchingCosts.Finally,Expedia’sscaleallowsittoeconomicallyofferrewardsandloyaltyprogramstoitscustomers.OnceExpediawinsacustomer,itsrewardsandloyaltyprogramsincentivizethecustomertobookwithExpediaoroneofitsbrandsagainandmakeithardtoswitchtoacompetitor.Forinstance,Hotels.comRewards®,theloyaltyprogramestablishedin2008,offerstravelerstheabilitytoearnonefreenightforeverytennightsstayed.IpersonallyhavetakenadvantageofthisrewardsprogramandwasreluctanttobookahotelthroughanysiteotherthanHotels.com.BeyondHotel.comRewards®,ExpediaoffersExpedia®+rewardsonover30BrandExpediapointsofsale,aswellasOrbitzRewardsonOrbitz.com.
Expedia, Inc.’s RisksNowthatExpedia’scompetitiveadvantageshavebeenconsideredlet’slookatsomeoftheriskfactorsthatcouldimpairourassumptionsofinvestmentreturn.
• Potentialcompetitionforwell-capitalizedmegacompanies.Expediamayencountermeaningfulcompetitionoverthenexttenyearsfrommegacompaniesthatalreadyhavethepocketbooksandusertrafficnecessarytobuildnetworkscaleandthedesiretoentera$1.6trillionmarketforthesakeofgrowth.ThesepotentialnewentrantsincludeGoogle,Facebook,Amazon,Alibaba,Baidu,
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TripAdvisor,andhotelconsortia.Focusedentrybyanyoneofthesecompetitorscouldleadtoindustrycommodificationandmargincontraction.Thatsaid,themarketcanprobablysupportsomelevelofincreasedcompetitionoverthenextseveralyears,asthetravelbookingmarketisextremelylarge,at$1.6trillion,andonlinepenetrationofthetravelmarketremainslow,especiallyoutsidetheUnitedStates.
• GrowthinAlternativeAccommodationsMarket.Theexplosivegrowthexperiencedoverthepastfewyearsinthealternativeaccommodationsmarket(thinkAirbnb)hastakenmanytravelcompaniesbysurprise.ContinuedgrowthandtransitiontowardalternativeaccommodationscouldhamperExpedia’scoreplatformbusiness.However,thismaybeoffsetbyExpedia’sHomeAwaysegment,whichcompetesinthealternativeaccommodationsspaceanddirectlyagainstAirbnb.Infact,Expedia’sHomeAwaysegmenthasexperienced35%year-over-yearrevenuegrowthand66%year-over-yearAdjustedEBITDAgrowthoverthelasttwoyears.Inthemostrecentquarter(endingSeptember2018),HomeAwayaccountedforapproximately12%oftotalrevenue,upfrom10.3%ayearago.
• LowerBookingsinEconomicDownturn.Finally,aneconomicdownturncouldnegativelyimpactExpedia’sresults.Thetravelindustryiscyclicalandaffectedbychangesineconomicgrowth.Duringeconomicdownturns,consumershavetypicallycutleisuretravelbeforemanyotherexpenses.Duringthe2009downturn,whenExpediawasstillayoungandgrowingcompany,saleswereflat.Ifadownturnweretooccurtoday,nowthatExpediaismature,itwouldprobablyexperienceadeclineinsales.
Opportunity CostsWheneveraninvestmentisconsidered,onemustcompareittoanyalternativestoweighuptheopportunitycost.Atthetimeofwriting,10-yeartreasuriesareyielding2.731%.Ifwetakeinflationintoaccount,therealreturnislikelytobecloserto1%.TheS&P500IndexiscurrentlytradingataShillerP/Eof28.5whichis69.64%higherthanthehistoricalmeanof16.8.Assumingreversiontothemeanoccurs,theimpliedfutureannualreturnislikelytobe-2.8%.Expedia,therefore,appearstoofferamuchbetterreturnforinvestorsatpresent,butotherindividualstocksmaybefoundwhichofferasimilarreturnrelativetotheriskprofile.
Macro Factors Investorsmustconsidermacroeconomicfactorsthatmayimpacteconomicandmarketperformanceasthiscouldinfluenceinvestmentreturns.Atthetimeofwriting,theS&PispricedataShillerP/Eof28.5.Thisis69.64%higherthanthehistoricalaverageof16.8suggestingmarketsareatelevatedlevels.U.S.unemploymentfiguresareata30-yearlowsuggestingthatthecurrentbusinesscycleisnearingitspeak.U.S.privatedebt/GDPcurrentlystandsat199.6%andisatitshighestpointsince2009whenthelastfinancialcrisispromptedprivatesectordeleveraging.
Summary Expediaiscompetitivelypositionedgivenadvantagesthataredifficultforcompetitorstoreplicate:(1)astellarportfolioofwell-knownandtrustedtravelbrands,(2)networkeffectscreatedbyapplysupplyanddemand,and(3)switchingcostadvantagescreatedbyitsabilitytoofferrewardsandloyaltyprogramsatscale.
Expediaiswell-positionedinalargeandgrowingglobaltravelmarket.Asmentionedabove,itisoneoftwodominantplayersandoddsarethatitwon’tbedisplacedfromtheduopolyanytimesoon.Furthermore,itisworthnotingthatthefuturelooksbrightforthecompany’sHomeAwaysegment,whichcontinuestogrowalongsideAirbnbinthepopularalternativeaccommodationsmarket.Infact,earlierthisyear,Airbnbwasvaluedat31billiondollarsintheprivatemarket,whichismuchhigherthanExpedia’scurrententerprisevalueofabout$18-19billion.
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Inshort,Expedia’sshareslookattractivelyvalued.Indeed,basedontheassumptionsusedintheanalysisabove,Expediamayreturnaround9.7%toshareholdersannuallyifpurchasedatthecurrentmarketpriceof$114.20.Assumingthatdiversifiedmarketinvestorsgenerallyrequirea7%annualratereturn(equatingroughlytoa14xearningsmultiple),thenitstandstoreasonthatExpediaistradingatabouta38-39%discount([9.7%-7%]/7%=0.3857)atcurrentprices.
Disclaimer:TheauthorofthisarticleislongEXPEatthetimeofwriting.
©TIPAcademycontentisforeducationalpurposesonly.Thecalculators,videos,recommendationsandgeneralinvestmentideasarenottobeactionedwithrealmoney.Contactaprofessionalandcertifiedfinancialadvisorbefore
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madefromusingthisassessmentorthetoolsmentionedintheassessment.
