Owners of Expedia Inc (NASDAQ:EXPE) are experiencing another wild ride following earnings. EXPE stock has experienced its second consecutive sell-off following an earnings report.
Now, under the leadership of a new CEO, the company must work to recover its earnings growth and the reputation it lost amid competition. While an eventual recovery remains likely, investors should hold out for a lower valuation on Expedia stock until it’s cruising for recovery.
Expedia’s Q4 2017 earnings-per-share came in at 84-cents-per-share. Analysts had expected $1.15-per-share. The company earned $1.17-per-share in Q4 2016. Revenues missed but fared better. The company reported $2.32 billion in revenue for the quarter. Although revenue missed estimates by $120 million, it still grew by 11% year-over-year.
For all of 2017, the company earned $2.42-per-share on revenues of $10.06 billion. This number comes in well short of the $4.61-per-share analysts had expected and the $4.49-per-share the company earned in 2016. The company came close to meeting revenue estimates as analysts had been looking for $10.11 billion, amounting to a $50 million shortfall. Wall Street reacted by sending EXPE stock tumbling by over 14% at one point the next day.
EXPE Stock Faces Competitive Onslaught
The Bellevue, Washington-based online travel agency offers a unique value proposition. Since it could bring travel deals to the fingertips of consumers, both EXPE and its peers replaced the local travel agency. Expedia built its influence by buying out many of its one-time competitors. Besides Expedia.com, the company has added Hotels.com, Hotwire, Orbitz, Travelocity and other sites over the years. In 2008, Fortune named Expedia the third most admired company.
This reputation bolstered EXPE stock following the financial crisis. From 2009 until the middle of 2017, the stock enjoyed a fantastic run. From a split-adjusted price of around $6-per-share in 2009, the stock had risen to $161-per-share by 2017. However, like its ranking on Fortune’s most admired list, the stock has also fallen from its peak. Since CEO Dara Khosrowshahi departed for Uber, the stock has been mired in a relentless bear market.
Also, despite a large number of buyouts, competition remains a threat. Priceline Group Inc (NASDAQ:PCLN), Tripadvisor Inc (NASDAQ:TRIP) and Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP) in China serve as their primary competitors. None of these competitors saw their stock experience large selloffs twice after earnings.
Moreover, it’s the competition with Priceline that has hurt Expedia the most. Priceline holds about double the room inventory as Expedia. EXPE promises to invest more in tech and marketing to close that gap. Benchmark Capital responded to this by downgrading EXPE stock from a buy to a hold. They believe 2018 earnings will come in at the low end of revised guidance. Benchmark believes that revenues will not offset costs of these investments.
Expedia Stock Remains Expensive
These 2018 earnings now weigh on holders of Expedia stock. They also wonder whether the May report will have this same effect. Such a call remains difficult to predict. However, even after these drop-offs, the stock looks a bit pricey from a valuation standpoint. The price-to-earnings ratio remains above 40. The P/E had been below 20 as late as 2015. Going back to 2011, Expedia stock traded under 10X earnings.
In those times, the company still enjoyed rising profits. This is not the case today. While I don’t recommend a short going into the next earnings report, Expedia stock now behaves like a falling knife that remains too pricey. Still, investors should watch this stock. With all of its websites, its continuing revenue growth, and the ever-increasing popularity of travel, Expedia will recover at some point.
Bottom Line on EXPE Stock
Although Expedia stock has become a story of falling profits and leadership turmoil, its offerings will make this equity attractive, someday.
Its quarterly earnings miss marks the second report in a row to spark a large selloff in EXPE stock. The stock price declines have left investors wondering whether the stock has further to fall, or whether they have a chance to buy in at a lower price. While I believe the latter will eventually be the case, buyers should hold out for a lower valuation. Once profits stop falling, and investors gain confidence in the new leadership, Expedia stock will move up once again.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.