Expedia (EXPE) continues to suffer from the sharp decline in travel, which was caused by the pandemic. Disastrous results in Q2 along with the painful recovery ahead make the stock uninvestable at this stage, especially at the current price. Going forward, COVID-19 will continue to have a negative effect on the company’s business, while Google (GOOG) (GOOGL) and Airbnb (AIRB) will make it hard for Expedia to thrive in a post-pandemic world, as it did in previous years. Since Expedia is exposed to things that are outside of its control, we don’t see any catalysts that will help the company to recover to its pre-COVID-19 levels in the near-term. While the cost-cutting program so far has been impressive, the company still estimates that it will burn around $275 million per month in the foreseeable future. For that reason, we stick to our opinion that it’s better to avoid Expedia’s stock.
No Catalysts for Growth
Before the pandemic, Expedia has been able to grow its revenues and actively repurchase its shares, while at the same time it was barely making a profit. However, as COVID-19 started to spread around the globe earlier this year, the company’s revenue quickly declined; its business is expected to be unprofitable in the next couple of years and investors should forget about any buybacks happening in the foreseeable future. In order to preserve cash, Expedia’s management recently sold the company’s stake in bodybuilding.com, closed ApartmentJet, and shut down HomeAway by transferring all the traffic from the website to its vacation rental platform VRBO. Despite all of this, a bulk of Expedia’s revenue will continue to come from the hotel industry, which will not recover in the near-term, as borders around the globe are closed, business and travel activities are at all-time lows and the pandemic is far from being over. Considering this, Expedia might be even forced to cut its 15% to 20% commissions, which it charges for bookings and reservations, in order to make its platforms attractive for hotel providers in the current environment.
Earlier in August, Expedia reported Q2 earnings results which disappointed lots of investors. Its revenues during the period were $566 million, down 82% year-over-year. Total bookings were also down 90% year-over-year and the business generated a negative free cash flow of -$2.2 billion. The period from April to June was undoubtedly one of the worst in Expedia’s history since the losses in Q1 were not as big in comparison to the latest results.
Currently, Expedia’s balance sheet shows that the company has $5.48 billion in cash and investments, while its long-term debt stands at $8.80 billion. While the company is on track to achieve $500 million in savings, it will continue to burn over $200 million per month to stay alive and is likely to raise even more debt along the way, which will only increase its debt burden.
In addition to the pandemic, which will keep the demand for travel at distressed levels and hurt Expedia’s bottom line, Google presents an existential threat to the company. With over $100 billion in cash reserves, the company could easily expand its presence in the online travel niche and disrupt the traditional OTA business. In addition to the metasearch business, Google now allows users to directly book hotel rooms on its Google Travel platform, making the use of services like Expedia and Booking (BKNG) less relevant.
Airbnb, on the other hand, is a major threat to the growth of Expedia’s vacation rental VRBO service. Unlike its core business, VRBO showed growth in Q2, but currently, it accounts only for ~10% of its revenues and is unable to offset the losses of the overall business. As a major vacation rental platform itself, Airbnb plans to become public this year and the company is currently valued at $18 billion. With an influx of additional capital and an already established foothold in the business, Airbnb has all the chances to accelerate its growth in a post-pandemic world and prevent services like VRBO from expanding further.
Considering all of this, Expedia’s recovery will take a long time and it’s unlikely that it will be able to keep its competitive advantages in the future. Also, until COVID-19 is fully contained, travel will not be able to recover to its 2019 levels and Expedia’s bottom line will continue to suffer. Without any catalysts for growth, Expedia has no other choice but to continue to cut down its costs, raise debt, and hope for the travel activity to return to normalcy, which is not happening anytime soon.
With negative P/E and EV/EBITDA ratios, Expedia’s stock managed to return to its early March levels, but there’s a limited upside from now on. The company also has one of the worst margins among its peers and Seeking Alpha’s quant rating has a negative stance on Expedia, which makes us stick to our opinion that it’s better to avoid its stock as no shareholder value will be created in the near-term.
Source: Capital IQ
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.