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Morningstar | Expedia Reports Another Solid Quarter, but Investors Are Still Discounting Its Network Advantage

Expedia shares were indicated up 8% after hours (set to outperform the S&P 500 for the fourth straight time following its earnings release), as it again showed solid results across its divisions and geographies, supporting our stance that investors continue to discount the company's network advantage (source of its narrow moat) that is buoyed by wise investments. We plan to lift our $180 fair value estimate around a mid-single-digit percentage, as Expedia's 2018 sales and EBITDA growth of 12% and 15%, respectively, surpassed our 11% and 12% estimates. Also, we plan to lift our 2019 EBITDA 9% growth estimate to the lower end of management's 10%-15% growth forecast, as we expect better marketing leverage and sales. Trading at just 9.5 times forward EV/EBITDA compared with the 11.3 times averaged over the past four years, we still see Expedia shares at an attractive margin.

Expedia continued to see positive signs of its investment into building international (38% of bookings) supply, witnessed by the 8% bookings growth in the quarter, ahead of our 4% estimate, and representing 34% two-year stacked growth (stable with the previous two quarters). We remain supportive of Expedia's spend overseas, as it will support its network advantage, and given it only has 2%-3% travel booking share in emerging markets versus 13% in the U.S. (we believe 85% of total industry online travel will come from international markets over the next five years). Meanwhile, U.S. (62% of bookings) results were also encouraging, with bookings growing 13%, ahead of our 8% estimate, and representing 20% two-year stacked growth (stable with the previous four quarters).

HomeAway's (11% of bookings) results support Expedia's international and urban build out investment plans, further supporting its network advantage. Bookings grew 15% versus our 14% estimate, although two-year stacked growth dropped to 62% from 68% last quarter, largely due to investment timing and lapping past initiatives.

The core OTA segment (81% of bookings) grew bookings 11% versus our 6% estimate, as the 21% two-stacked trend remained stable from the past four quarters. The outlook for the OTA division is supported by the 200,000 traditional lodging properties Expedia added in 2018, double the 2017 amount, and up 40%. Meanwhile, the Egencia business (8% of bookings) saw 10% bookings growth compared with our 8% forecast.

In addition to top-line strength, Expedia also leveraged marketing expense 128 basis points to 51.4% versus our 52.6% estimate, and the company expects further leverage in 2019, as it uses data analytics to improve optimization and its Trivago brand sees better efficacy. That said, we still think Expedia will see marketing deleverage in 2020 and 2021, as it invests in growth areas to build out its network before leveraging that advantage in 2022. This view is supported by adjusted marketing expense excluding Trivago deleveraging 66 basis points in the quarter.

For more information on the sum-of-parts analysis of Expedia's four segments refer to our January 2019 report "Expedia Parts Sum Up to Attractive Worth for Investors."