Expedia Group Inc (NASDAQ: EXPE) delivered terrific results on Thursday. It appears the booming economy under President Trump has created additional opportunities for people to enjoy vacations, and for businesses to pony up for more travel. Let’s dig into these numbers and see exactly what’s going on with Expedia, and determine if there are enough long-term catalysts for us to consider purchasing EXPE stock.
Gross bookings and revenue both increased 15% year-over-year, the former jumping $27.2 billion, and the latter $2.5 billion. I had predicted that HomeAway would be purchased by Expedia. That purchase appears to be paying off handsomely, as bookings grew 46% to just under $4 billion.
More and more lodging locations are joining Expedia, with the total now up to 665,000 properties — up a whopping 74%. This included 25,000 new HomeAway listings, bringing the total to 1.6 million.
At this point, Expedia group owns a gigantic portfolio of online travel brands: Expedia, Hotels.com, Expedia Partner Solutions, Egencia, Trivago, HomeAway, Orbitz, Travelocity, Wotif, Lastminute.com.au, ebookers, CheapTickets, Hotwire, Classic Vacations, Expedia Group Media Solutions, CarRentals.comTM, Expedia Local Expert, Expedia CruiseShipCenters, SilverRail Technologies, Inc., ALICE and Traveldoo.
It also appears that international travel and bookings are on the rise. Domestic gross bookings increased 10% but international grew 25%, although 40% of that 25% came thanks to foreign exchange impact. Lodging continues to lead the way for EXPE, accounting for almost two-thirds of revenue.
Saving Grace for EXPE
All this great news, however, leads to a very depressing conclusion which the market doesn’t seem to care about: EXPE only generated $52 million in operating profit, and that’s after adding back $167 million in depreciation.
The only saving grace here is that the company generates a lot of free cash flow, just short of $1.5 billion for this quarter alone. EXPE stock also carries $4.7 billion of cash and short-term investments.
Obviously, the question we want to ask is “how can revenue growth be so strong and yet the company not make any money?” The answer lies in expenses, particularly in selling and marketing. While online travel companies are indeed cash cows, because there is very little capex involved in these businesses, the trick to running a business that makes money is keeping expenses in check.
To be fair, these online businesses can’t always be judged based on their net income. It is the free cash flow that they tend to be valued by. They are very similar to the many online businesses that John Malone’s Liberty Media and IAC/InterActiveCorporation (NYSE:IAC) hold — inasmuch as the market tends to look at free cash flow and operating income before depreciation and amortization in rendering its valuation judgment.
Bottom Line on EXPE Stock
I’m much more excited by Expedia stock generating a $6 billion free cash flow run rate than I am at an annual net loss, for obvious reasons. To that end, EXPE stock trades at 20 times trailing 12 month free cash flow whereas Booking Holdings Inc. (NASDAQ: BKNG) trades 25 times TTM FFC. IAC stock trades at almost 40x.
So on that basis, EXPE stock is arguably undervalued. I will say that owning either EXPE stock or Booking Holdings for the very long term probably makes very good sense, as they basically own the market between them at this point.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. Meyers does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.