- Expedia stock has had a good run over the past decade. It grew cumulatively 882% from 2009 through 2017, earning investors 4x the return of S&P 500, with the highest annualised return recorded in years 2011–2012.
- The key indicators that guided this phenomenon were a strong year-on-year growth in revenue and a high amount of cash generation. Although the company did not lead in terms of income margins when compared to peers, it was able to maintain a consistent uptrend in gross profitability and free cash flow.
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Expedia Group (EXPE) runs travel fare aggregators and metasearch engines, including CarRentals.com, Expedia.com, HomeAway, Hotels.com, Hotwire.com, Orbitz, Travelocity, Trivago, Venere.com and Vrbo. Originally started under Microsoft in October 1996, EXPE was listed in 1999 on Nasdaq. It was subsequently acquired by InterActive Corp and then spun out again in 2005. At that time, the stock hovered around USD30-40. It was only between 2009 and 2017 that the company achieved its most impressive price momentum. The cumulative growth reached 882% which was four times more than what S&P500 earned during the same period. An investment of USD1,000 at USD15.94 and a subsequent exit at the highest price point of USD156.47 would have turned USD9,816.
Numbers that stood out
Fully interactive charts on Expedia and peers at the link above (best viewed on a desktop or in landscape mode on a mobile device).
The company’s revenue growth was exceptional, ballooning from USD2.743 billion in 2009 to USD11.22 billion in 2018 with a CAGR of 16.95%. This was largely driven by expansion into new business lines and additional sales channels. EXPE accounted a 6% share of the global travel spending total of USD1.17 trillion in 2018.
The Merchant (direct-to-consumer) segment constituted more than 65% of business value at USD2 billion at the start of analysis in 2009. This increased to USD5.9 billion by 2018, at a cumulative growth rate of almost 195% over a ten-year period. The Agency business (or corporate sales) moved from USD639 million to USD3 billion. EXPE’s most impressive feat, however, came through the introduction of their HomeAway business at just USD20 million in 2015, which quickly turned into a major contributor to total revenue with USD1.17 billion by 2018.
Impressive revenue growth was largely driven by strong free cash flow positions that allowed EXPE to channel more funds into technology as well as sales & marketing. Cash held in EXPE grew from USD688 million in 2009 to USD2.4 billion by 2018, financed mainly by operating cash flows which averaged more than USD1 billion a year. Due to a correlation between the company’s cash position and share prices, it is possible that investor trust too could be driven by robust cash flows. Levered free cash flow margins were at their highest in 2012 and 2014-2015, which coincided with the stock’s biggest runs.
The revenue analysis also revealed a considerable rise in EXPE’s operating costs, as a result of the increasingly intense competition in the online travel market: the operating ratio went up from 83% in 2009 to 93% by 2018. Nonetheless, operating income has begun to show improvement recently, having reached the lowest value in 2015 at USD468 million and subsequently rising up 67% to USD783 million in 2018, bolstered by the introduction of a new profitable line of business.
Strong cash flow positions helped EXPE keep debt low. The debt to asset ratio stood on average around 20% which allowed the company to use internally generated funds to finance growth-oriented investing activities, whilst still keeping cash flow positive.
Peer analysis
The closest competitors to EXPE are Booking Holdings (BKNG), TripAdvisor Media Group (TRIP), Trip.com Group Limited (CTRP), Travelzoo (TZOO), and MakeMyTrip Limited (MMYT). Of particular interest are EXPE’s profitability metrics relative to peers and group averages.
CTRP led the pack growing sales at an average rate of 35.7% per annum, with MMYT following close at 34.2%. As the second largest online travel company in the world after EXPE, BKNG maintained strong growth rates with 23.1%, beating out EXPE on most years (except for 2016 and 2017). TZOO was the clear winner in terms of return on capital employed, its values almost double of peers’. BKNG came second, but it dominated in terms of net margins, reaching the high of 27.5% amongst the peer group in 2018. Meanwhile, TZOO’s net margin stood at low 4.4% in the same year, along with EXPE’s at 3.6%. Free cash flows wise, BKNG took the top spot again generating 26% cash from sales made in 2018; TRIP and EXPE were second (10.8%) and third (7.4%) respectively.
A key indicator many investors tend to look at is a firm’s ability to generate high return on capital; net income as reflected by high margins is another major criterion. (The two are not dissimilar to Joel Greenblatt’s magic formula investing.) Among the competitors analysed here, BKNG exhibited the strongest business growth model, and hence the company’s share prices performed the best growing more than ten times from 2009 to 2018.
Although EXPE did not manage to outdo peers in most years, the stock showed decently during the period of analysis, and its own performance across indicators has been fairly consistent. For one, EXPE had particularly strong gross margins: from 2009 to 2015, they stood between 75% and 80%, whilst the group average was 73%. Operating margins, however, showed a different story as the group averaged more than 20%, while EXPE numbers went down from 18% in 2009 to just 10% by 2014. The company’s struggle with cost control was the likely culprit. EXPE’s net margins and return on equity too were generally below the group averages.
Factor analysis
Despite being the largest online travel facilitator in the industry, EXPE is still growing at double-digit growth rates year-on-year thanks to a three-pronged business strategy:
- Smart acquisitions have helped EXPE not only diversify into new markets but also enhance their integrated suite of services. They invested in eLong, China’s second largest travel company; in Venere to gain presence in Europe; Via Egencia to move into the Nordics; and Wotif Group to enter Australia. At the same time, they acquired Mobiata to improve the quality of flight services and invested in Autoescape to provide travellers with car rental options, to name a few. As result, the share of foreign sales in EXPE doubled from 20% in 2005 to 40% in 2010 and reached 45% by 2018.
- Although more than half of its total revenue comes from lodging (69% as of 2018), EXPE has persisted in enhancing travel experience across the entire value chain, aiming to increase earnings per customer. In this pursuit, it has moved into travel advertising, car rental, travel insurance, travel activities, ticket bookings, and private vacation spot rentals. EXPE says their various acquired technologies “talk to each other” resulting in very high optimisation of assets, in confirmation of the company’s value proposition to deal with all travel needs in one place.
- Data analytics has become a core component of business at EXPE, helping it uncover reasons behind bookings of repeat customers. Among its findings is a positive correlation between the number of listings and repeat purchases. In 2018, EXPE had around 895,000 property listings, with an additional 300,000 in alternative accommodations. Due to the vast range of offers and engaging content, EXPE has turned a common brand name attracting high organic web flow. EXPE currently has a website SEO rank of 114, whilst competitors are all lower: BKNG at 265; TRIP 6,554; TZOO 1,751; and MMYT 3,665. This competitive advantage that EXPE enjoys underpins its ability to maintain premium growth rates and attractiveness for value seeking investors.
In summary, although EXPE’s earnings showed a rather erratic trend, the share price followed a steady growth path. Worthy of note, after a period of sustained earnings growth from 2009, the P/E ratio dropped to its lowest in 2011; if bought at this time and held at least for a year, the stock would have returned more than 100%. Similarly, an entry into EXPE in 2015 would also be especially profitable. However, a continued uptrend in prices in more recent years and much higher P/E values portended a fundamental change for cautionary investors.
At the same time, EXPE’s P/FCF numbers remained relatively low all throughout the period of analysis, indicative of the company’s efficiency in managing cash flows, following the pace of price increments. The total return of 882% during the period of analysis up to 2017 makes it possible to tie investor sentiment to free cash flow levels at EXPE. The peer analysis versus BKNG and TRIP too confirms this observation, with EXPE having the lowest P/FCF numbers. (BNKG, on the other hand, had the lowest P/E ratios in most years, its earnings exerting the most influence on the big stock momentum.)
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