Expedia (EXPE) has more exposure to the broader economy than most of the stocks in our portfolio, given the fact that whenever there is an economic downturn, one of the first things people cut back on is travel, notes Todd Shaver, growth stock specialist and editor of BullMarket Report.
That said, we’ve hit a temporary stock market downturn, not a full-blown economic downturn. Expedia is still up 13% YTD, and the company has a strong cash flow model, and has been diversifying across revenue streams, so we’re excited about what the future holds.
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The big strategy shift for Expedia has been the focus on Airbnb competitor HomeAway. The business line has seen excellent revenue growth in each of the last two years (32% in 2017, and 30% last year).
Discounted travel is also viewed as recession-proof, given that when times get tough, more people flock to services like HomeAway as opposed to staying in pricier hotels. So it’s a nice hedge for Expedia to be diversifying into a revenue stream that works well under tighter macro-economic conditions.
Expedia is also sitting on close to $5 billion in cash. With $4.3 billion in debt, that leaves some breathing room for the company going forward, in terms of ramping up HomeAway or making a strategic M&A decision.
The company also produces solid free cash flow (FCF), and has the lowest price/FCF ratio of any of its competitors. Expedia is currently around 13.4 price/FCF. Contrast that with Booking Holdings (17.2) and TripAdvisor (18.1), and Expedia is looking very affordable along this metric.
Its HomeAway business has higher margins than its core online travel agency business (11% for HomeAway, 8% for the core business), so we expect FCF to grow as Expedia further diversifies into HomeAway.
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Expedia is vulnerable to the swings of the broader economy, however the company is less vulnerable than its competitors in the online travel agency space, given the strong diversification into HomeAway and FCF generation.
The company pioneered the online travel agency space and continues to aggressively pursue market share, so we’re comfortable management will navigate the choppy waters ahead. Expedia may not be our biggest performer of 2019, but there’s a growth story here that will present itself once the broader market calms.
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