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Morgan Stanley Rating Predicts a Bright Future for Expedia

Zacks Equity Research

Shares of Expedia Inc. EXPE soared recently following a bullish research note from Morgan Stanley, which has given a boost to investors’ confidence. Shares of Expedia raced to a high of $131.23 following Morgan Stanley’s favorable report and ultimately closed at $129.41 on Jan 11, gaining 1.8% during the day.

In its report, Morgan Stanley upgraded shares of Expedia to overweight from an equal one, based on the company’s decisive efforts to expand in the overseas markets by acquiring properties beyond the largest hotels to serve its customers better. Analyst Brian Nowak of Morgan Stanley expects the shares to return almost 23% in the upcoming 12 months and reach a target of $160.

Nowak said in a report that the firm is "planting seeds for faster growth" by buying up properties in the international markets. He also added, “We are bullish about Expedia's recent strategic investments to increase its global property supply. We are particularly positive on Expedia's more refined hotel supply strategy, given we believe Expedia's non-vacation rental supply count is still roughly 50 percent of Priceline's ... and increased selection should lead to higher conversion and an increased ability to bid on Google keywords to drive traffic and user growth."

Nowak also seemed optimistic about Expedia’s HomeAway platform. According to him, the company is progressing well by integrating 95,000 listings of HomeAway, thus making the total count on Expedia platform 500,000.  This in turn also improves the supply of instantly bookable properties. Moreover, Nowak expects HomeAway to generate 27 percent room night growth in 2018.

Also, management sees great potential in HomeAway business, which is why Expedia is making continuous investments in it. Hotel acquisition ramped up in 2017 with the company having announced to add 80,000 properties last year. Going forward, the company expects to do a step change as well. These positives will ultimately help drive the company’s capacity to grow revenues.

Apparently, Nowak sees 2018 as an investment year and expects Expedia’s strategic investments to pay off in 2019.

The stock has gained 9.6% in the past 12 months, underperforming the 22.2% rally of the S&P 500 index.

Our Take

Expedia is well-positioned in the online travel and alternative accommodation space. The company has been snapping up companies to increase its penetration in the existing markets while expand in others and also eliminate competition. We believe, HomeAway has significant growth prospects as it is relatively disorganized but competition is also intense, given the success of Airbnb and Priceline. Moreover, the growing number of travelers around the world and the company’s efforts to capitalize on this density by adding inventory, collaborating with local players and stepping up its own marketing efforts, makes us optimistic about the company’s future.

Zacks Rank & Key Picks

Expedia has a Zacks Rank #3 (Hold). Broadcom Limited AVGO, NetApp, Inc. NTAP and NVIDIA Corporation NVDA are a few better-ranked stocks in the broader technology sector, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Broadcom, NetApp and NVIDIA is projected at 13.8%, 11.3% and 10.3%, respectively.

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