Expedia Expected to Recover, Shares Are Undervalued

Narrow-moat Expedia EXPE provided investors with three key updates April 23: first, a performance update that highlighted continued weak industry demand; second, additional steps to improve its liquidity profile, including a high-cost preferred share raise; and third, the solid choice to appoint Peter Kern and Eric Hart as CEO and CFO, respectively. We don’t plan a material change to our $138 fair value and continue to see the shares as undervaluing Expedia’s sizable network advantage that underlines its narrow moat.

Expedia announced a first-quarter booking drop of 38%-43%, including an 85%-90% decrease in the second half of March, driven by global shelter-in-place mandates. Global market reopening plans and the rebound trajectory of hotel occupancy in Asia-Pacific (currently at around 20% from roughly 10% in February, according to recent hotel operator updates) imply a slow 2020 recovery pace for travel demand, in our view. As a result, we could lower our 2020 Expedia booking estimate to fall mid-45% (versus a high 30% decline currently). Still, we don’t envision a material change to our fair value estimate, as we still expect global travel demand to recover to 2019 levels in 2022-23.

We believe Expedia has enough liquidity to operate under current conditions through 2021. It had already suspended share repurchases, tapped its $1.9 billion credit facility, and worked to remove $300 million-$500 million in cost efficiencies. In addition, the firm gave encouraging details on its $5.9 billion in March 31 deferred merchant bookings balance, which we think implies that only about $2 billion (versus around $3 billion) is at risk of negatively affecting Expedia’s working capital if canceled. Also, Expedia raised $2 billion in secured debt and $1.2 billion in a preferred share offering to private investors Apollo and Silver Lake, although the cost of the latter appears high for an investment-grade company (9.5% dividend and two board seats given), in our view.

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