Is Expedia Undervalued?
In this article, I’ll value Expedia (NASDAQ: EXPE)
Before I dive in — a disclaimer:
The information does not constitute financial advice or recommendation and should not be considered as such. Value Bob is not regulated by any authority, its author(s) are not financial advisors and it is therefore not authorized to offer financial advice.
How I Found The Opportunity
I was recently valuing various companies that I use regularly in my life. I got the idea from re-reading Peter Lynch. So, one idea I had was to look into Expedia. We use it at work whenever we book flights. We also use Hotels.com for hotel rooms, as the loyalty points really add up. I recently got an email announcing One Key — a loyalty program that you can use across any of Expedia’s websites. It was then that I realized just how many businesses Expedia owns. I actually didn’t even know they owned hotels.com until I received that email. I was shocked to see that Expedia actually owns 23 sub brands consolidated into a few core brands— many of which I know and use. This made me want to dig a little bit deeper.
Quantitative Valuation
As always, I like to start by doing a valuation without looking at the stock price or market cap. I value the stock, and if the price is at or below my valuation, I will buy it. In general, I like to look for companies that will give me a 20% return without growth. So, I value all stocks using 20% yields. I’ll show you want I mean below.
Here are the steps I took to value Expedia:
1) I looked up the free cashflow:
2023 — 1,844.00
2022 — 2,778.00
2021 — 3,075.00
So, over 3 years, it looks like the average free cashflow is $2.5B roughly.
2) I checked the book value (also called shareholder equity):
I saw it was $2.786B.
3) I checked the net cash:
I saw that the cash on hand was $5.689B.
Since the cash on hand is more than the book value, I can only count the difference. What I mean is that although Expedia has $5.689B cash, the maximum “net cash” we have is only $2.786B, since the remainder will be needed to cover any debts.
So, we have $2.786B in cash. We will round it up to $2.8B.
4) Now I can do a rough valuation:
I would rather be roughly right (and super fast), than precisely wrong (and spend hours playing with a spreadsheet). So I have enough information to do a rough valuation.
I get $2.8B in cash. I also make $2.5B a year in free cashflow.
If I want 20% a year, I should pay a maximum of $12.5B for the free cashflow. ($2.5/12.5 = .20 or 20%).
I also get the cash so $12.5 + $2.8 = $15.3B.
So, if I can buy Expedia for around $15B, I will make 20% yields as long as Expedia keeps earning $2.5B a year or more.
5) Now I can check the market cap:
I check the market cap and I can see it is selling for $15.37B.
6. I compare my valuation with the market cap:
Earlier I said:
If I can buy Expedia for around $15B, I will make 20% yields as long as Expedia keeps earning $2.5B a year or more.
Okay, so I can see it’s selling for $15.37B.
My valuation was $15.3B. So close enough. If I buy Expedia at today’s prices and the company continues earning the same free cash flow or more as it does today, I will make 20% returns.
That is it — my quantitative valuation is now complete — it is very fast — and I know I have found a potentially undervalued company. The remaining part of the valuation is qualitative.
Qualitative Valuation
Now that I know the stock is undervalued, I can look at a few “Warren Buffett style” elements of qualitative valuation.
We will look at the following:
- Is it easy to understand?
- Does it have a durable Moat (is it a monopoly, duopoly, etc)
- Is management honest and capable?
- Is it stable and predictable? (Revenue and profit)
- Is cash “piling up”
- Are insiders buying?
- Are they buying back shares?
Is it easy to understand?
Buffett has a “yes”, “no” and “too hard” pile. I think Buffett might ignore Expedia because it’s a tech company, but I personally feel comfortable valuing it because I am a customer, and I understand their business model. Expedia is a digital “middle man” also called an OTA (Online Travel Agency) for booking hotels, flights, vacation rentals and cars online. They charge a 15–25% commission to the airline, hotel etc. when a customer books through Expedia online. In return, the hotel, airline, etc. gets a steady source of customers. Expedia are masters at using digital advertising (like google adwords, SEO, etc) to get leads to their website, then keeps them coming back through their loyalty program and massive reach.
I would say I comfortably understand the business:
- They advertise online
- They help customers book online
- They help hotels, airlines etc get customers
- They take a commission of 15–25%
- They also sell other digital products to hotels, airlines etc
- They retain customers with loyalty programs and their massive advertising reach
Does it have a durable Moat (is it a monopoly, duopoly, etc)
I forget where I heard this, but I remember that you can always tell a company is a monopoly IF they try to convince you they are NOT a monopoly.
As such, this stuck out to me:
Sarah Gavin, vice president of communications at Expedia, told CNBC that the company plays “a small part” in the travel market.
https://www.cnbc.com/2017/05/05/hotel-industry-targets-priceline-and-expedias-duopoly.html
Also, a quick google search shows many hotels, associations and individuals complaining about monopolistic practices, consumer complaints and comparisons to Priceline.com — all signals of a Duopoly.
We can also assess each of the 5 moats:
- Switching Costs (customers are locked in)
- Intangible Assets (brand/consumer recognition)
- Network effect (more valuable the more people who join)
- Cost advantage (can produce the same product as competitors for a lower price)
- Scale advantage (their cost per unit goes down as their scale goes up)
It seems that expedia does have switching costs, as companies utilize their technology for internal tools, loyalty programs, and it’s integrated into revenue management tools used by hotels and airlines (to change the pricing based on demand). They definitely have a brand as nearly everyone I know has heard of Expedia, Hotels.com and VRBO. They have a network effect as the more hotels/airlines, the more people who will visit the site (and the more people who visit the site, the more reason for hotels and airlines to join). They likely have cost advantages as they get discounts on advertising in bulk and likely can hire the same marketing and sales teams to distribute many of their products. Finally, they likely have a scale advantage as their cost per click and cost per booking would be much lower as they can spread those costs over a high number of customers.
I would say that it is highly likely that Expedia has EVERY SINGLE MOAT there is.
It’s hard to say how durable the moat is with any technology company — but I can say that since Expedia IPO’d in 1999 at a market cap of $275.6M (based on 5.2M shares at $53 each. Since that time, it has grown 56x in 25 years. It’s been a great investment to date.
Is management honest and capable?
On February 8, 2024, Expedia announced in Ariane Gorin.
Ms. Gorin has held various executive roles at Expedia Group since 2013, most recently as President of Expedia for Business, where she delivered outstanding financial results including B2B revenue growth of 33% in 2023 vs. 2022. As President of Expedia for Business, Ms. Gorin led the Company’s global supply partner group, advertising business, and B2B partner network that powers many leading global brands with travel tech.
I like that Ariane Gorin has a strong background of performance in the group. However, I’d want to take a deep dive into the broader leadership team before investing. I consider that beyond the scope of this post, but at a high level, I trust the management team.
Peter Kern, the previous CEO stepped down after only 4 years in the role.
He shares more about why in the video below:
Is it stable and predictable? (Revenue and profit)
I also checked the company’s average gross profit margins over the last decade. They are at “software company” levels of 81% — this to me, could be indicative of a moat. The net margins are not good, but with the level of reinvestment and growth associated with that reinvestment, I’m not surprised. If I could invest $1 and make $2.25, I would keep spending the money too.
Is cash “piling up”
Here, we can just check the cash on hand over time:
Are insiders buying?
A quick scan here shows that insiders are not buying, but are selling — this could be a bad sign, but could also be business as usual (as people need to sell stock to make money). Certainly the lack of buying could be a sign they aren’t big believers the company is selling at a discount. This would lead me to do more, deeper research.
Are they buying back shares?
Expedia is currently undertaking a buyback program — with $5B in buybacks announced in 2023. So far, it looks like $136M of buybacks have taken place in 2024, and $150M of buybacks occurred in 2023. That means that $4.7B in buybacks could occur.
If it does, our current market cap of $15.3B could shrink to $10.6B. If cashflow stays at $2.5B a year, that would be a 23% annual return without any growth. But the company has been growing — like a rocketship — for over 20 years.
Completing The Analysis
At this point, I am not ready to invest.
Nowhere near ready.
I’d want to first:
- Read their annual reports to get a better idea of their performance by segment and how they make their money
- Understand all of this data about Priceline
- Talk to some of their employees/past or present
- Learn about their history
- Understand where growth (or loss of revenue/profit) may come from
- Analyze the risk associated with their debt
- Look into short positions in the company
- Read write ups on Value Investors Club
- Look into the 13Fs to see if any Super Investors have bought the company
- Learn more about Ariane Gorin’s plans for the business (and listen to additional commentary from Peter Kern)
- Look into the balance sheet for hidden assets (or overstated assets)
But — overall, this business ticks the boxes to make it worthy of deeper analysis.
If you found this helpful, you can Download my free E-book here to learn more about valuation.
