EUR 850.00 For Business Accounts Only

Morningstar | Expedia's 1Q Solid to the Core; Vrbo Slowdown a Temporary Event; Shares Attractive

Expedia reported solid results, witnessed by total two-year stacked bookings growth of 23% (stable with the previous three quarters), supporting our view that its network advantage (source of its narrow moat) remains intact. By segment, bookings growth was solid at the Core OTA (78% of total bookings), offset by a slowdown at the Vrbo vacation rental business (14%), which should prove temporary. We see little reason to materially adjust our $183 per share valuation, which estimates 10% average annual sales and EBITDA growth over the next five years, and view shares as attractive.

We see Vrbo's bookings growth deceleration to 5% this quarter from 15% last quarter as temporary, with sales reacceleration in 2020. Expedia is re-platforming the HomeAway brand to Vrbo, as the latter represents the majority of its vacation rental business and resonates better with customers, according to Expedia. Based on our knowledge, brand consolidations create booking headwinds lasting roughly a year. Still, it is encouraging that Expedia said the Vrbo brand itself had booking growth of double digits in the quarter, supporting the decision to emphasize the brand ahead of HomeAway moving forward. Also, total Expedia vacation rental two-year stacked bookings growth was a healthy 52%, well ahead of the mid-30% Phocuswright estimates the online U.S. alternative accommodation market grew over 2017-18, implying that the brand remains strong.

We see evidence that investments to build supply content is supporting Expedia's network advantage. Both Core OTA and the U.S. region (62% of total bookings) two-year stacked 20% bookings growth remained directly in line with the average posted the past three quarters in those respective segments, with both areas posting stable take rates. Meanwhile, international two-year stacked 30% bookings growth was down from the 34% average the past three quarters due to currency headwinds, while the take rate was stable.

Expedia maintained its 2019 EBITDA growth guidance of 10%-15%, despite around 400 basis point headwind from cloud investments, which begin to wane in 2020. We don't plan any material change to our 13% 2019 EBITDA growth estimate and think the company can sustain low-double-digit EBITDA growth over the next few years. One driver of EBITDA growth in 2019 is that Trivago (owned by Expedia) is driving marketing efficacy, which drove total Expedia marketing costs as a percent of revenue to 58.8% from 60.4% in the prior year. That said, we maintain our view that pullbacks in performance channel spend are largely temporary, and that Expedia and Trivago will look to increase performance spend as we approach 2020, given the need to invest in industry growth areas like experiences and vacation rentals. In fact, we are already see evidence of Expedia lifting its marketing spend, as expense here was 57.4% of total revenue versus 56.4% last year when excluding Trivago.