Earlier this year, Morgan Stanley analysts voiced their bullishness towards Expedia Inc (NASDAQ:EXPE). In their view, EXPE stock was undervalued relative to the investments the company was making abroad. Snapping up hotels in key European and Asian markets, EXPE laid the groundwork for future growth. The problem? Shares are down more than 5% for the year.
An even bigger problem for Morgan Stanley analysts was that they boosted their price target to $160.
Currently, shares trade hands at a little over $113, which is almost 30% below their target. Such is the peril of Expedia stock predictions. But what happened that a renowned firm like Morgan Stanley was so far off its forecast?
The obvious catalyst was the fourth quarter 2017 earnings report, which found EXPE stock missing its earnings-per-share target. It wasn’t just the disappointing quarter. The last time the company beat its earnings estimate was Q2 2016. Investors are only human, and thus, they lose patience just like everyone else.
That said, our own Chris Lau argued that the markets are overreacting to the earnings miss. What the bears failed to understand was that these were necessary costs to manage their rich asset portfolio. Revenue growth looked great as a whole, and for individual business units. Yet EXPE stock floundered, causing Lau to state, “Instead of cheering Expedia for the investment paying off, the market is scrutinizing the higher expenses incurred in Q4.”
Again, we have the perils of Expedia stock predictions.
Lau’s arguments, which align with Morgan Stanley’s position, make perfectly logical sense. So should investors pile into EXPE stock at these incredibly discounted rates? Or is there something more that Wall Street is concerned about?
Competition Makes Things Tough for EXPE Stock
While I acknowledge that Expedia has made aggressive acquisitions, and even better, those acquisitions appear worth their salt, the online travel agency plies its trade in an ultra-competitive environment. Adding to those concerns are American attitudes towards international travel.
InvestorPlace contributor Will Healy takes a more cautious approach with his Expedia stock predictions. Ultimately, he views EXPE recovering from its malaise. But to get there, the organization has to demonstrate stability and confidence, especially with the new leadership change.
That’s an internal issue that really shouldn’t exist: publicly traded companies are usually not afforded the luxury of time to get their stuff together. Especially at this juncture, Expedia has multiple top competitors, including Priceline Group Inc (NASDAQ:PCLN), Tripadvisor Inc (NASDAQ:TRIP) and Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP).
Critically, Healy notes that “None of these competitors saw their stock experience large selloffs twice after earnings.” Further, “Priceline holds about double the room inventory as Expedia.” This explains the acquisitions and the general bullishness implied in recent Expedia stock predictions.
But what you may want to consider is that Americans are among the least likely to travel abroad. According to The Washington Post, the U.S. ranks 60th among 100 nations for international travel. Moreover, when we do travel abroad, we’re incredibly cheap, ranking 33rd.
Not only does this contribute to the snobby, “ugly American” stereotype, Expedia’s international market faces headwinds. The international investments it seems should be backwards. More people are coming to us than we are going to them.
The distribution of online travel sales worldwide reflects this dynamic. With Americans not traveling abroad despite a relatively strong economy, our domestic online travel agencies struggle with market share. In the meantime, agencies in the Asia-Pacific region are booming, which is not surprising.
Expedia Stock Has a Bumpy Road Ahead
Bullish investors may counter my argument in that Americans prefer to vacation domestically, and why not? We have plenty of things to do here, and it’s rare to meet people who’ve visited all 50 states.
But the reality is that with domestic travel, Americans overwhelmingly prefer driving. During the most recent holiday season, more than 97 million people hit the road according to AAA. For air travel? A comparatively measly 6.4 million. Right there, that eliminates a huge chunk of airline booking revenues.
Also very concerning is volatility in EXPE stock. Since October of last year, shares have dropped to lower plateaus in rapid-fire succession. This isn’t just about being garden-variety bearish; Wall Street has a very dim view on EXPE and I think you can see why.
I’m not really into giving precise Expedia stock predictions. I will say that I’m not convinced the selloff is over. The travel agency has leadership issues, competitive challenges, industry headwinds and its shares are crazy volatile. Its acquisitiveness is a good thing, but not good enough.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
