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Ishan Majumdar
Ishan Majumdar
Articles (27) 

Expedia Is an Excellent Momentum Play

The stock’s recent recovery, upcoming results, solid growth potential and reasonable valuation make it an interesting pick for momentum players and long-term investors

January 21, 2019 | About:

There are few stocks that offer a combination of strong short-term momentum, good yield and excellent future growth prospects. Currently, Expedia Group Inc. (NASDAQ:EXPE) is one such stock that is demonstrating all three of these positive characteristics. With brands like Egencia, Wotif, Travelocity, HomeAway, CheapTickets, Hotwire, Trivago, Hotels.com and many more under its umbrella, the travel giant has demonstrated remarkable growth in its top line, profitability and stock price over the years. It continues to operate in a market with immense growth potential and is bound to provide excellent returns to investors over time.

A recap of Expedia’s growth story

Expedia has been one of the top-performing stocks within the tech industry over the past decade. Investors that have held on to the stock have seen their initial investment multiply nearly 15-fold and the stock has beaten the S&P 500 by a huge margin. This can be attributed to the amazing bookings growth the company has witnessed across its different brands.

The five-year compounded annual growth of the company's revenue is 20.50% and the free cash flow has grown at a compounded rate of 24.40% over the same period. As management added more and more brands to its portfolio, the book value per share grew at an annualized rate of 17.12%. These numbers speak volumes for the company’s excellent growth story.

Continuing growth potential and good quarterly results

There is little doubt with respect to Expedia’s future growth prospects. Despite its amazing growth rate, its current bookings are at around $100 billion, which is hardly 6% of the $1.6 trillion bookings industry. There is undoubtedly a lot of potential for growth and for the company to maintain its double-digit quarter-over-quarter growth.

Expedia reported total revenue of $3.28 billion for the third quarter, which was up 10.4% from the prior-year quarter. It missed estimates by about $20 million. However, the company made up for this by reporting earnings of $3.65 per share, which was 53 cents higher than estimates. The stock managed to show good recovery after the tech selloff toward the end of 2018 and is showing good momentum so far this year. Its fourth-quarter results will be announced at the beginning of February.

The momentum is in Expedia’s favor

As shown in the three-month price chart, the stock has gone through a fair share of ups and downs. The current momentum has pushed the stock price above the 20- and 50-day simple moving average lines. Despite this sharp rise, the stock’s 14-day relative strength index continues to remain below 60, which means the company is not overbought. With the potential for good quarterly results, it would be a good idea for short-term traders to go long purely on the momentum the stock is gaining.

The stock has plenty to offer long-term investors as well

One of the highlights of Expedia’s performance over the years has been its excellent yields. It is one of the few tech players that has not only shown capital appreciation, but also provided good dividends and carried out regular stock buybacks. As of today, the company is paying an annualized dividend of $1.28 per share, resulting in a trailing dividend yield of 1.05%. Its recent buyback in 2018 resulted in an additional yield of 4.23%, resulting in an overall yield of 5.28% for the previous year, which is excellent.

In terms of valuation, the stock is cheaper than peers like Booking Holdings Inc. (NASDAQ:BKNG) and TripAdvisor (NASDAQ:TRIP), especially when we analyze the enterprise value to earnings before interest, taxes, depreciation and amortization and price-book valuation metrics. The stock is currently trading at an EV-to-revenue ratio of 1.78 and an EV-to-EBITDA ratio of 11.74, which are fairly reasonable and which have good scope for expansion. The company could become a good long-term value pick if it is entered at these multiples.

Conclusion

Expedia has something to offer momentum traders as well as long-term investors. The company’s immense growth potential, decent yield, improving quarterly performance, reasonable valuation and price momentum are all favorable factors. Guru Ron Baron (Trades, Portfolio) has added more of the stock to his portfolio, which is also an indicator of how reasonably valued the stock is today. Overall, Expedia is a good investment for short-term as well as long-term investors.

Disclosure: No positions.

About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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