The global economy may still be struggling to grow by a few measly percentage points this year, but that isn’t stopping those of its inhabitants who still possess healthy disposable incomes to travel even more. The result? Online travel agency Expedia (EXPE) has become a market darling in the course of the last year, thanks in part to the company’s fundamentals and part to its push to acquire related businesses. But the magnitude of that rally, which has greatly outstripped the rate of growth in either revenues or profits, coupled with the company’s recent wariness about the level of competition it faces, may mean that it’s time to hold back from adding more of this stock to a portfolio.
Part of the issue is that Expedia’s dramatic outperformance has left the stock priced for perfection. Its rally over the last year has left it trading at 30 times trailing earnings, about double the level for the S&P 500 as a whole. Mark Mahaney, the star Internet analyst who has found a new home at RBC Capital, recently argued that its archrival, Priceline (PCLN) is “the single best stock to own” from amongst all Internet companies in the event of an economic rebound. (It also is slightly cheaper than Expedia, trading at about 26 times trailing earnings.) In particular, Priceline has put pressure on Expedia in the hotel reservation business, winning market share: that’s significant since that is the part of the business where margins can be higher.
For now, bullishness about Priceline (which snapped up Kayak Software in the ongoing war for market share) has been somewhat muted by the fact that the company is heavily exposed to Europe’s woes; a larger share of its revenues and profits come from that continent. But Expedia’s CEO, Dara Khosrowshahi told analysts early this month that its rival had become a better competitor, and that Expedia itself would spend more heavily on marketing early this year, even though results might not be visible until later in the year. That may mean that the company’s financial results in the early quarters of 2013 may be underwhelming or even disappointing; as the company’s CFO, Mark Okerstrom, cautioned during the earnings conference call, growth would be harder to come by in the first months of 2013.
One argument in Expedia’s favor is the company’s strong free cash flow (which has won it a place on the list of “top ten” investment grade credits just published by research firm Gimme Credit). Moreover, the company has shown itself willing to buy back stock in the past, and with its recent jump in the amount of cash on its books, could undertake another buyback. That would help offset the fact that Expedia’s current dividend yield, which stands at an underwhelming 0.8%. But that would also require the company’s board to accept that its shares are currently undervalued, a rationalization that it may be difficult to make.
Indeed, at current price levels, this is a stock to own but not to acquire in the absence of a reduction in the price or valuation, or some other catalyst. Yes, its 24% gain in revenue last year was impressive, but that already appears to be fully priced in to Expedia’s share price. With powerhouse Internet players Google (GOOG) and Facebook (FB) eyeing the lucrative online travel business, the outlook for such continued growth is far from certain.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at email@example.com.
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