Expedia (EXPE) stock was hit with a downgrade from Deutsche Bank analyst Ross Sandler yesterday. Sandler bumped EXPE stock from “buy” to “hold” and dropped his Expedia stock price target from $66 to $51.
On the news, EXPE plunged by 6% and has lost another 1% so far today. That brings year-to-date losses to almost 22% for Expedia stock.
Sandler noted some major headwinds for EXPE, including an increased competitive environment. He also warned that abrupt management changes at the company’s Hotels.com division may signal more problems ahead.
But have investors have already factored bad news into Expedia stock? To see, let’s take a look at the pros and cons:
Strong Portfolio: Expedia has massive scale, with supply from about 200,000 hotels, 300 airlines and various car rentals and cruise lines. And EXPE sites — which include Hotwire.com, Hotels.com, CarRentals.com and more, on top of the Expedia namesake — get about 50 million unique visitors every month. Plus, EXPE also owns a majority stake in eLong (LONG), which is the second largest online travel company in China.
Technology: Expedia is also a pioneer of the online travel space and has continued to innovate and invest large sums in its infrastructure. In fact, Expedia recently announced a long-term alliance to operate the technology platform for Travelocity (for U.S. and Canadian markets). The result is likely to be a boost to EXPE revenue, since Expedia will have new channels to distribute its supply.
Global Expansion: For the most part, rival Priceline (PCLN) has been much more aggressive in foreign markets, especially in Europe. PCLN has performed much better than Expedia as a result. But over the past couple years, Expedia has been busy playing catch up. In Europe, Expedia is seeing lots of traction with Germany-based Trivago, a search engine it recently bought a majority stake in. And Asia is another big priority for EXPE. Besides its eLong asset, Expedia also has a 50/50 joint venture with AirAsia, a low-cost carrier, which should be a nice source of demand.
Earnings: Expedia posted terrible second-quarter earnings back in July, as both EPS and revenue missed analyst expectations. EXPE stock lost over a quarter of its value as a result. On the conference call, Expedia noted continued problems with Hotwire.com and more pressures from competitors. The result: EXPE has seen a drop in traffic. On top of that, third-quarter Expedia earnings, which are slated to be released Oct. 30, are only expected to improve by around 3%.
Valuation: Even with after the Expedia stock sell-off, shares of EXPE remain far from cheap. EXPE stock is trading for a trailing P/E of 46 vs. 33 for Priceline and 23 for Travelzoo (TZOO). And considering the recent volatility, investors are certainly jittery about EXPE stock. As a result, another earnings disappointment could have a severe impact.
Competition: As we’ve mentioned, the U.S. market has been getting tough for EXPE as rivals like Bookings.com continue their marketing blitzes. On top of that, there are countless online startups in the space. A few names include Hipmonk, HotelTonight and Triporati … and all leverage social media and mobile.
While the U.S. market for online travel is nearing maturity, there are still big opportunities in Europe and Asia — and EXPE is definitely pushing hard in these markets.
But as competition grows, it will likely get more expensive to snag customers, which will mean lower margins for EXPE. At the same time, Expedia stock is hardly cheap. And even on a technical basis, things look concerning. Expedia stock appears to be in retracement mode on the downside.
For investors, it is probably best to wait until after the next Expedia earnings report, which once again is scheduled for the end of the month.
And in the meantime, the cons outweigh the pros for EXPE stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.