Expedia: Omicron Variant and High Debt Are Risks

Expedia Group, Inc. (EXPE) is an online travel company that engages in providing travel products and services to leisure and corporate travelers. It operates through the following business segments: Core Online Travel Agency (OTA), Trivago, Vrbo, and Egencia. The Core OTA segment offers a full range of travel and advertising services to worldwide customers through brands such as Expedia.com and Hotels.com.

The Trivago segment involves sending referrals to online travel companies and travel service providers from its hotel metasearch websites. The Vrbo segment operates an online marketplace for the alternative accommodations industry. The Egencia segment manages travel services to corporate customers worldwide. The company was founded in 1994 and is headquartered in Seattle, WA.

I am bearish on EXPE stock. There is a lot of uncertainty in 2022, yet with the consequences of the Omicron variant of coronavirus to the global travel industry, the company has important profitability and financial health concerns.

Expedia Group: The Bullish Side

Travel demand seems to have rebounded fast from the collapse in 2020 amid global vaccine rollout programs, which is reflected in the sales growth of Expedia for the first nine months of 2021. The revenue growth in 2021 for Q1, Q2, Q3 was 35.4%, 69.4%, and 40.3%, respectively.

Expedia reported strong third-quarter 2021 results with a beat on EPS and revenue. GAAP EPS of $2.26 was a beat by $1.19, and revenue of $2.96 billion beat by $243.16 million.

More important was the fact that Expedia showed a profit in Q3 2021, as in the previous two quarters, it had reported net losses.

Year-over-year gross bookings increased 117%, revenue increased 97%, and operating income was positive, coming in at $524 million versus -$113 million in Q3 2020.

In business segments, the Retail and B2B segment revenue increased 89% and 142% year-over-year, respectively, and Expedia Group (excluding trivago) revenue increased 96%.

Expedia Group: The Bearish Side

There are several fundamental risks to the company and its stock now. The gross margin has declined from 83.4% in 2018 to 80.2% now.

In 2020 the debt/equity ratio of EXPE stock surged to 5.78 from 1.19 in 2019, and as per the latest quarter, it was 5.05.

The stock has an Altman Z-score of 1.1, which is very poor and signals financial distress. EXPE stock has a current ratio of 0.9, which is not good and indicates that problems may arise for the company in meeting its short-term obligations.

Other negative factors that support the bearish side are the fact that shareholders have been diluted in the past year, as the number of total shares outstanding grew by 7.1%.

EXPE Stock Valuation

The stock price is close to a 10-year high which is not itself a bad thing. However, Expedia is now trading at 15.8 times its book value. The hotels, restaurants & leisure average industry price-book ratio is 3.5.

Analyzing the cumulative net income for the first nine months of 2021, Expedia has reported a net loss of $374 million and a free cash flow of $2.93 billion. The operating margin of -4.8% in the last 12 months is also concerning.

EXPE stock earnings are expected to be highly volatile as the global travel industry weighs on the implications of increased demand. There is sustained uncertainty, as rising COVID-19 cases cause people to question whether we are near the end of the pandemic or not. 

Airline companies and hotel stocks have been tested a lot by COVID-19, and everybody is looking for the optimistic scenario of putting the pandemic behind as a bad memory very soon.

Wall Street’s Take

Expedia has a Moderate Buy consensus based on eight Buys and 12 Hold ratings. The average Expedia price target of $192.42 represents 6.6% upside potential.

Conclusion

Expedia has a lot of debt, profitability, and financial health risks that cast a shadow on the latest strong earnings. It would be wiser to wait for the next quarters to monitor whether the global travel industry has rebounded and the pandemic does not pose any travel restrictions or worries to consumers.

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