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Why Expedia Could Underperform the Market
Stock Analysis & Ideas

Why Expedia Could Underperform the Market

Despite the inconveniences due to the COVID-19 crisis, the shares of Expedia (EXPE) have performed better than its peers over the past three years, albeit well below the stock market.

The great uncertainty caused by the Omicron variant will continue to weigh on many industries, with travel likely to be one of the hardest hit. As such, I don’t think it’s wise to go beyond a neutral approach on this stock.

Expedia operates as an online travel service provider in the United States and internationally, serving consumers, businesses and online travel service operators through its Trivago hotel metasearch platform.

The Retail segment includes several renowned brands such as Expedia, Hotels.com, Orbitz, Travelocity, CheapTickets, CarRentals.com, Hotwire, Classic Vacations and Expedia Cruise.

In addition to various online travel services, the company provides lodging accommodations and online car rental booking services.

Further, the company provides online travel services through the following brands: Wotif.com, lastminute.com.au, travel.com.au, Wotif.co.nz and lastminute.co.nz brands.

Q3 Earnings

Earnings were positive for Q3 2021. On an adjusted basis, earnings per share were $3.53 per share, beating the average consensus estimate by $1.77, while GAAP earnings per share were $2.26, beating the average consensus estimate of $1.19.

These results were generated on total revenue of nearly $3 billion, an increase of more than 97% in the third quarter of 2020, ahead of the average projection of $240 million.

This happened amid negative trends, sequentially, in accommodation bookings, air travel and several other travel products, all of which declined from the previous quarter due to the COVID-19 Delta variant.

Consolidated net cash used in operating activities was $1.22 billion, consuming higher resources, approximately $818 million, compared to last year’s quarter. Consolidated free cash outflow was $1.4 billion, further deteriorating by $405 million from the prior year.

Uncertainty Weighs on Sector Outlook

The pandemic is not over yet, and Omicron is still prompting us to stay at home and rethink our habits to prevent the spread.

Anthony Fauci’s statements certainly do not bring optimism, as the No. 1 in the U.S. health system said that a universal vaccine effective against all variants is needed, which implies that the risk of other COVID-19 mutations cannot be ruled out.

To worsen the picture, there is also a fear (as WHO Director for Europe Hans Kluge unveiled recently) that the variant is migrating to Eastearn European countries where vaccination rates are lower and where the disease can have serious consequences among unvaccinated people.

This very precarious situation threatens to shut down many players in the industry unless their financial conditions are strong enough to continue while things may still be rocky.

Expedia’s balance sheet isn’t one of the soundest financially speaking, as evidenced by a debt-to-equity of 4.2, an Altman Z score of 0.98 – indicating financial distress zones – and a negative return on invested capital (ROIC).

As for the profitability and short-term solvency of Expedia, the business is an underperforming one as sales have fallen sharply over the past three years, while the company struggled to meet obligations within its trailing 12-month period. The last aspect can be seen from the current ratio of 0.93.

Wall Street’s Take

In the past three months, 20 Wall Street analysts have issued a 12-month price target for EXPE. The company has a Moderate Buy consensus rating, based on eight Buys, 12 Holds and zero Sell ratings.

The average Expedia price target is $192.42, implying 4.4% upside potential.

Conclusion

At this point, the global environment seems too uncertain to choose a top rather than neutral approach for Expedia and other operators, whose stocks may continue to underperform in the coming months.

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