Expedia: Belt Tightening Will Offset Macro-Driven Vrbo Weakness (NASDAQ:EXPE)

Wachiwit Expedia (NASDAQ:EXPE) can’t seem to catch a break. Despite a recent broad-market rally that breathed some fresh life into Expedia stock, the company is still dealing with a post-earnings overhang from reporting weakness at its vacation rental platform, Vrbo. Year to date, shares of Expedia have now lost more than 10% of their value, even as the stock trades at a single-digit P/E ratio on next year’s earnings. Now, in my view, is a great time for investors to re-assess the bull case in this stock. Data by YCharts Vrbo isn’t the only home-sharing platform to see pain I last wrote a bullish note on Expedia in April, prior to earnings. While I admit I was blindsided by Expedia’s guidance cut, we have to ask ourselves two balancing questions when thinking about investing in Expedia going forward: How much of this weakness is already priced into the stock’s post-earnings slump? Is this truly company-specific weakness, or something we’re observing across the board? In my view, home rental platforms are seeing a bit of a retrenchment while overall travel demand and hotel bookings are soaring. This actually gives Expedia a leg up against the likes of Airbnb, since the majority of its platform generates revenue from hotel bookings. All in all, I remain bullish on Expedia. We’ll address the elephant in the room first: the guidance cut. Speaking to the softer Vrbo trends the company has observed on the Q1 earnings call, outgoing CEO Peter Kern noted as follows: As for gross bookings, our B2B business continued its strong performance, and our B2C business, excluding Vrbo, was in line with our expectations. Unfortunately, that only partly made up for a slower than expected ramp-up for Vrbo post its technical migration. As we discussed last quarter, we had pulled back on Vrbo marketing in the second half of last year while we went through our migration. And while we have been ramping that spend and the product has been improving, we have seen a slower than expected recovery. Based on this and the overall trends in our B2C business so far in Q2, we expect growth to be lower than what we had initially anticipated for 2024. We are, therefore, lowering our full year guidance to a range of mid to high single-digit top line growth, with margins relatively in line with last year. We still expect to see broad improvement across 2024 in our B2C business, with the best early indicator being the conversion gains we have seen driven by higher test velocity and future rollouts. Behind that, we will continue to invest in Vrbo and our international growth markets to reignite those flywheels to set us up for continued growth in the years to come.” Expedia doesn’t break out Vrbo results separately, so we can’t see exactly how much the segment is decelerating. We can, however, point to Airbnb’s Q1 results to show that this may be a broader industry trend. As shown in the snapshot below, Airbnb’s nights and experiences booked slowed to 9% y/y growth in Q1 (three points weaker than in Q4), while in dollar terms, gross bookings value also slowed three points to 12% y/y growth: Airbnb Q1 results (Airbnb Q1 earnings release) Expedia, meanwhile, saw similar but slightly better performance for the company as a whole. Booked room nights of 101.2 million grew 7% y/y in Q1, decelerating two points from 9% y/y growth in Q4. Expedia Q1 results (Expedia Q1 earnings release) The company noted that it saw very strong performance in its hotel segment. We may be seeing evidence of a shift in customer preferences. While many customers gravitated toward Airbnb in its earlier days, citing cost as well as the unique factor of staying in a home in a potentially non-commercialized neighborhood, hotels are making a resurgence. Hotels, after all, are a completely distinct product. They come with a suite of amenities (gyms, pools, restaurants, and services like dry cleaning or room service) that Airbnbs can’t match. And given recent price inflation on Airbnb, hotels are often competitive on pricing – especially as companies like Expedia offer rewards through its new One Key program that effectively gives customers 2% cash back on their bookings, whereas Airbnb currently offers no loyalty benefits at all. While the short term may see Expedia lose momentum due to Vrbo, in the long run, the company’s business is driven far more by the performance of its partner hotels – and from what we see so far, it’s doing quite well in this regard. Profitability and incredible valuation The other important factor we should address: in February, Expedia announced layoffs covering 1,500 employees, or 9% of its workforce. This is evidence of a belt-tightening culture at the company that will help it to scale profitably. Without yet seeing a full quarter of benefit from this layoff, in Q1 already, Expedia expended adjusted EBITDA margins by 190bps y/y to 8.8%: Expedia Q1 adjusted EBITDA (Expedia Q1 earnings release) At present, Wall Street analysts have a consensus EPS target of $14.88 for Expedia in FY25 on the back of 8% y/y revenue growth, which represents 26% EPS growth against this year’s $11.82 consensus (+22% against FY23 actual EPS of $9.69). So at current share prices near $127, Expedia trades at just 8.5x FY25 P/E. Key takeaways Yes, Expedia is still undergoing a business transition as it works to integrate its One Key program across its products, including and especially Vrbo. But the stock has already fallen too far relative to still-robust expectations for FY24 and beyond. Furthermore, we can see that Expedia’s Vrbo-related weakness is being echoed across other home sharing platforms, including the titan of the space itself: Airbnb. In my view, we’re poised to see hotels gain more bookings share this summer travel season, which will benefit OTAs like Expedia and Booking.com (BKNG). Trading at just a single-digit multiple against next year’s EPS, I’m buying Expedia on the dip with confidence.

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