The Henry Fund Henry B. Tippie College of Business Yun-Hsin (Jocelyn) Liu [[email protected]]
Expedia Group, Inc. (EXPE) November 13, 2020 Consumer Discretionary – Online Travel Agencies Stock Rating NO ACTION Investment Thesis Target Price $111-136 Henry Fund DCF $111 We recommend No Action for Expedia Group due to its 16% potential upside. Our Henry Fund DDM $136 recommendation is based on the current market conditions where uncertainties Price Data remained since COVID-19 outbreak. The pandemic has made direct impacts to the Current Price $117.5 travel industry due to a steep decline in consumer spending, and increasing 52wk Range $40.76 – $119.9 competition in the industry. Most importantly, depending on how long the effective Consensus 1yr Target $111.8 vaccine would be made available to the general public, traveling industry could Key Statistics return to norm slower than expected. In addition to the vaccine, we are also closely Market Cap (M) 13,296 monitoring other potential factors that might expedite the recovery for global Shares Outstanding (M) 147.2 economy such as firm’s ongoing expansion in Chinese market. Institutional Ownership 98.7% Drivers of Thesis Five Year Beta 1.66
• Direct Impact of the Covid-19 Outbreak: Lack of effective vaccine and the long Dividend Yield 0.0% duration of pandemic has materially impacted consumer’s demand for traveling Est. 5yr Growth (EPS) 4.5% and the usage of Expedia’s platform as a result. With the expectation of slower Price/Earnings (TTM) 24.3x recovery, we are forecasting a lower-than-historical average annual growth rate Price/Earnings (FY1) 46.3x of -25% in 2020 fiscal year, 20% in 2021 fiscal year, and 9% afterwards (2022- Price/Sales (TTM) 1.5x 2024) in retail revenue segment [3]. Price/Book (mrq) 7.7x Profitability • Significant Decline in Consumer Spending: EXPE has underperformed the Operating Margin -12.7% industry by 37x and the sector by 34x in ROE ratio [2]. Since COVID-19 outbreak, Profit Margin -30.6% there is significant decline in consumer spending. EXPE holds 90% revenue from Return on Assets (TTM) -2.7% direct travel booking, hence it has been affected the most when compared to Return on Equity (TTM) -45.6% its peers.
• Increasing Competition in Online Travel Industry: Online travel industry has seen increased competition over the past few years. Large companies such as EXPE Industry Sector Google has also penetrated the industry offering a lower cost alternative [4]. 40 Operating margin has decreased by 55% since 2017 because of higher 34.6 competition in the industry [3]. 30 28.4 Risks to Thesis 24.3
• Economic Rebound Following Effective Vaccine Being Widely Available: If the 20 effective vaccines have been verified and started to become widely available for people across countries, we expect a quick and significant improvement in 10 consumer demands in traveling. This would strengthen Expedia’s core online 4.2 2.1 booking revenue and overall financial health. 1.6 0.2 0 • Competitive Position in the Industry with Strong Network and Leading Digital P/E ROE-0.9 ROA Platform : Expedia’s strong network effect has contributed to its uniqueness and -10 competitive advantage. For this reason, we modeled a better-than-peers annual average growth rate of 9% in retail revenue segment after fiscal year 2021 [3]. -20 • Further Growth in Chinese Market: Expedia could benefit from further expansion in China, in-destination, and vacation rental markets. Earnings Estimates -30 -32.5 Year 2017 2018 2019 2020E 2021E 2022E -40 EPS $2.49 $2.71 $3.84 $-13.93 $-0.45 $3.88
Consensus $-8.65 $-0.38 $3.96 Source: Yahoo! Finance, Net Advantage Growth +9% +41% -463% -97% -968% 12 Month Performance Company Description 50% EXPE S&P 500 Expedia is the world’s largest online travel agency by bookings, offering services for lodging, air tickets, rental 0% cars, cruises, in-destination, and other and advertising -50% revenue. The company operates through three business -100% segments: Retail, B2B, and Trivago. Transaction fees for
-150% online bookings account for the bulk of sales and profits NDJFMAMJJASON of Expedia. Expedia was founded in 1994 and is Source: Yahoo! Finance headquartered in Seattle, WA.
Important disclosures appear on the last page of this report.
COMPANY DESCRIPTION Fiscal Year 2019 Sales Breakdown by Segment
Expedia Group, Inc. is an online travel company. The company is 5% 5% one of the world largest travel agency, with nearly 25,400 employees. The company’s offerings primarily include airline Retail tickets, hotel reservations, car rentals, cruise arrangements, and destination services [6]. B2B The company used to operate in four major business segments which are Core Online Travel Agency, Vrbo, Trivago, and Egencia. 90% Trivago Core Online Travel Agency generates revenue by providing a full range of traveling and advertising services to the customers. Vrbo generates revenue by operating an online marketplace for Source: EXPE FY 2019 10K the alternative accommodations industry. Trivago segment generates revenue by advertising, primarily from sending The following sections detail further information about each referrals to online travel companies and travel service providers revenue segment and firm’s profitability: from its hotel metasearch websites [6]. Retail However, at the beginning of the first quarter this year as an effort to keep its revenue stream clear to investors, Expedia has Ninety percent of Expedia’s revenue is generated by the Retail changed its reportable segments into: Retail (Core online travel revenue segment. This revenue provides a full range of traveling agency, and Vrbo revenue segment combined), B2B (Egencia and advertising services for customers around the world. The segment before), and Trivago. We have also incorporated this variety of brands include Expedia.com and Hotels.com in the revenue segment change into our model. The retail segment U.S., and localized Expedia and Hotels.com websites throughout provides a full range of traveling and advertising services to its the world: Vrbo, Orbitz, Travelocity, Wotif Group, ebookers, customers. B2B revenue segment provides booking services to CheapTickets, Hotwire.com, CarRentals.com, CruiseShipCenters, the corporate customers. On the other hand, Trivago segment Classic Solutions and SilverRail Techonologies,Inc. [10]. generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its This revenue segment has experienced the largest drawdown hotel metasearch websites [10]. since the COVID-19 outbreak. Since the pandemic, many people have cancelled their travel plans in order to minimize the In particular, the retail revenue segment has started to face chances of getting infected. The chart below shows a 78% drop increasing competition from other players. Its competitors in tourist arrivals around the world when compared to prior include Booking Holdings. (Ticker: BKNG) and its subsidiaries year. Fifty seven percent of Expedia sales comes within the U.S., Booking.com and Agoda.com, Trip.com (Ticker: TCOM), and and forty three percent comes from international [5]. As a TripAdvisor (Ticker: TRIP) which in some cases may have more result, Expedia’s retail segment dropped 80% YoY as of Q2 2020 favorable offerings for travelers or suppliers such as better [10]. pricing and wider options.
We have adjusted the revenue segment that was reported for Historical International Tourists Arrivals fiscal year 2019 so that it would reflect the change that the firm has made this year. The following shows the revenue breakdown by segment:
Source: UNWTO
We expect the demand in traveling will only start to pick up again when an effective vaccine is approved and able to be made
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available to the general public. As a result, we projected a 25% The chart below shows historical and projected revenue growth decline in this revenue segment in 2020, 20% growth rate in for B2B: fiscal year 2021, and an annual average growth rate 9% from 2022 - 2024 to reflect a slower recovery from pandemic [3].
Source: Henry Fund Model
Source: EXPE HF Model Trivago B2B Five percent of Expedia’s revenue comes from Trivago, which is a hotel metasearch website. Trivago revenue segment generates Five percent of Expedia’s revenue comes from the B2B revenue advertising revenue from sending referrals to online travel segment. This revenue segment generates revenue by providing companies and traveling service providers from Trivago’s traveling services to businesses and their corporate customers. websites [10]. Even though Trivago has been spending a The B2B segment is comprised of the company’s Expedia significant amount of advertising fees worldwide to increase its Business Services organization such as Expedia Partner search traffic, Google has become the largest hotel metasearch Solutions [10]. engine. According to Fornova, Google earns 79% of all hotel metasearch bookings, while Trivago earns 30% [23]. The chart Since the pandemic, many companies are now working from below shows each key player’s market share hotel metasearch home and has reduced the frequency of business trips to cut industry. costs. As a result, in the most recent quarterly report, Expedia reported a -13% YoY in this revenue segment.
We expect the pandemic to continue to worsen since the flu season is just around the corner. On the other hand, as the situation has lasted for more than six months now, people started to become more relaxed and less cautious about social distancing. For this reason, we project a 25% drop in B2B revenue segment which is aligned with the industry average estimate based on the data gathered from Statists [11]. In addition, we also project the travel industry to recover gradually from 2021-2024 as more companies continue to work from Source: Fornova home and lower costs on businesses travels. We believe for business travel to return back to normal; it will take another two In addition, given the decline in traveling demand post COVID- to three years. Therefore, we project a lower than the historical 19 outbreak, online travel agencies have dramatically reduced average annual growth rate of 6% in B2B revenue segment [3]. marketing speed, including on trivago. As a result, in Q1 2020, trivago revenue segment reported a drop of 23% year-over-
year. The management team indicated in the Q2 2020 announcement that it expects trivago revenue segment to continue to experience significant pressure on revenue and profit until online travel agencies and other hotel suppliers begin to see the consumer demand pick up again, which will then increase their marketing demand [10]. Moreover, we expect hotel metasearch revenue from Trivago to continue to decline as Google continues to dominate and increase its market share in hotel metasearch. Therefore, we expect the firm’s revenue to
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drop -25% in 2020, which is aligned with recent travel industry Expedia’s gross margin as of 2019 is at the middle range when growth. From 2021 through 2024, it is expected to deliver an compared to its peers including TripAdvisor (Ticker: TRIP), annual average growth rate of 1% (lower than the historical Booking Holdings (Ticker: BKNG), and Trip.com (Ticker: TCOM). average annual growth rate) to reflect more competition in hotel metasearch [3]. Gross Margin as of Fiscal Year 2019 The chart below shows historical and projected revenue growth 90% for Trivago: 86% 85% 82% 82% 79% 80%
75% EXPE TRIP BKNG TCOM
Gross Margin FY 2019
Source: FactSet
Source: Henry Fund Model Below is a line graph of our model margin projection: Cost Structure
EXPE incurs costs in relation to the operation of the business, including direct costs to support its customers as well as fees to air ticket fulfillment vendors, credit card processing fees, fraud and chargebacks, and other costs that are related to data center and cloud costs to support its websites. Expedia also incurs transactional level taxes, personnel and overhead costs [10].
As of Q1 2020, cost of revenue has increased $139mm year- over-year. This was driven by an increase in bad debt expense as a result of higher booking cancellation and refunds due to COVID-19 [10].
Thus, we project an average 18% direct cost as a percentage of Source: HF Model total sales from 2021 – 2024 as we expect COVID-19 effect continues to be in place [3]. We expect the margin growth to maintain at historical level of 82% from 2021-2024, and 78% gross margin in 2020 to reflect The following chart shows EXPE’s cost breakdown: lower travel demand. ESG
According to FactSet, EXPE ranked a score of 23.4, which is in the third percentile compared to other companies in the market, and at 32th percentiles for the ESG score. FactSet also ranked EXPE as a medium risk company. The company is committed to include qualified candidates with a diversity of race/ethnicity and gender in the selection of employees. In
Source: EXPE FY2019 10K addition, Expedia has committed to socially or physically exclude bullying in the workplace to ensure its employees are working in a safe environment. Partnered with 3 Degrees, Expedia has purchased Green-e® climate certified carbon
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offsets that focus on methane capture, which is 21x more revenue from 2021-2024 which is higher than the historical potent than the Co2 in terms of its global warming impact [21]. average of 17% in the technology and content expense [3].
According to the Management team’s guidance on both EPS and RECENT DEVELOPMENTS repurchase program, we expect the Company to continue to & INDUSTRY TRENDS suspend its share repurchase program like it announced in Q1 2020 in order to maintain financial liquidity. For this reason, we EXPE Third Quarter Earnings expect no share repurchase in 2020 fiscal year and will slowly buy back the shares as the economy gradually recover from The table below shows EXPE’s analyst’s consensus and actual 2021-2024. EPS and Revenue that were announced on 11/4/2020: Overall, we believe Q3 2020 for Expedia does show some Actual Street Miss/ improvement from last quarter, though it is still hardly the same Consensus Beat? level of growth that we’ve seen a year ago. Amid the pandemic EPS $-0.22 $-0.79 Beat in the U.S. has worsened recently (the total number of COVID- Revenue $1.50 billion $1.38 billion Beat 19 cases topped 92,660 as of 11/4/2020), we expect COVID-19 Source: Benziga cases to continue to worsen as we approach to flu season and colder weather. Therefore, we see the recovery of this industry In Expedia Group’s 3Q 2020 report, EXPE reported a better than to be a long path and expect Expedia to continue to see slow and expected financial results. The company’s losses from the gradual recovery. impact of COVID-19 moderated in Q3 2020, but gross bookings and revenues still dropped 68% and 58% respectively year over Decrease in Consumer Spending year [12]. Vrbo’s revenue was reported better than expected, while all other revenue segment continue to decline as an effect Consumer Spending decreased sharply since the start of the from COVID-19. pandemic in March. The graph below shows historical consumer spending level from 201 through August 2020. Although • EPS: $-0.22 per share, -107% YoY consumer spending rebounded back in July 2020, we do not • Revenue: $1.50 billion, -58% YoY driven by lower demand in expect to see quick recovery from here. We project consumer travel. However, comparing with June, the revenue has spending to continue to maintain at current level or even lower declined less since. [20] when flu season starts. For this reason, we project an annual • Retail revenue growth -52% YoY : average total revenue growth rate of 18.3% growth rate in 2021 Though negative, the retail revenue growth rate is less to reflect slow recovery, and 8.5% going forward from 2022 negative than originally expected. The decline in Retail through 2024 [3]. segment revenue was offset by the growth at Vrbo. Similar to Q2, Vrbo remains the bright spot for the company. Vrbo Historical Consumer Spending saw both bookings and revenue increase compared to the third quarter of 2019. The Management team indicated they have been trying to push Vrbo globally since many people are now using it to find nice vacation houses, condos, cabins, cottages, and apartments. • B2B revenue growth -72% YoY driven by slower recovery for corporate travel demand. • Trivago revenue growth -75% YoY driven by slower recovery for travel demands. • Air revenue -87% YoY: with a -74% YoY in plane ticket sold
The Management team’s guidance includes “keenly focus on Source: Trading Economics driving margin expansion” through resetting the fixed cost base, reduce variable costs of revenue and improve marketing Moreover, nine percent of Expedia’s revenue comes from efficiency. In addition, the Management team also indicated that advertising and media that provides a platform for travel the company is working on “retool and recalibrate all the companies to post their advertisement [10]. The chart below algorithms…to optimize for multi-brand instead of brand against shows the travel industry digital ad spending has decreased 41% brand“ [12]. Thus, we expect an annualized rate of 18% year over year since the pandemic started. The chart also technology and content expenses as a percentage of total projects a slow recovery of 2.3%, which is sustained at the 2020 level but way lower than 2019’s growth rate. Therefore, even
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though we do expect the travel industry to recover going Many Countries Issue Travel Restrictions and Limit Tourism forward, it will take some time for this industry to go back to Businesses Result in Higher Cancellations and Refunds : On what we have seen in 2019. March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Ninety percent of Expedia’s revenue comes from booking trips, hotels, cruises, and Historical and Projected Travel Industry Digital Ad Spending other travel related activities. In addition, many countries have issued travel restrictions and quarantine orders, as well as limited operations for hotel and airline suppliers. This has had a significant impact on the travel industry [10]. Throughout Q2 2020, Expedia’s revenue dropped 15% accordingly. Expedia has also taken action to cut costs and reserve liquidity. For example, Expedia Group has deferred some capital expenditures, and temporarily suspended construction on several real estate projects [21]. However, in the near term, we expect travel industry to continue to decline as we expect more COVID-19 cases to be reported going forward in the U.S.
Source: eMarketer COVID-19 Impact
According to FactSet, the impact score indicates that Expedia Group is directly impacted by the COVID-19. Source: HF Model
2019 vs. 2020 Air Travel Daily Passenger Traffic MARKETS AND COMPETITION
Travel agencies offer a service that is primarily related to helping customers find the most economical way to travel. Thus, this industry has become largely price base. Due to this fact, many smaller travel websites has been entering into the industry and making the industry competition fiercer [15]. In addition, the ease of online services have led to an increasing number of customers browsing various types of travel websites that are similar to Expedia Group in order to find the best available price. However, there are also some other elements that are non-price competition in this industry such as providing good quality of service, providing detailed knowledge of destinations and products, and providing good recommendations to clients and being part of franchise [15]. From regulatory perspective, this industry also has low barriers to enter since there are no Source: CNBC obstructive licensing requirements that would otherwise Since March when the pandemic started, air travel has been preclude new travel agents from starting a new business. As a significantly hit. Even though the travel demand climbs back result, Expedia and other larger travel companies could face after May 2020, the passenger traffic volume is still relatively strong competition from the smaller companies who might offer low when compared to 2019’s data. better services and better algorithm in helping customers find the best option available.
As a result, we expect more players to enter into this industry over the next five years. According to IBIS world, over the next
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five years, the travel agencies industry will likely experience Peer Comparisons changes to its structure due to increasing competition in this industry [15]. In the following paragraphs, we conduct a competitive analysis between Expedia Group, Trip Advisor, Booking Holding, and The chart below shows IBIS World expects this industry to enter Trip.com. into a slow growth mode going forward: The chart below details firm’s revenue breakdown by segments, across EXPE’s competitors:
Revenue Breakdown by Segment
100% 90% 89% 90%
80% 67% 60%
40% 25% 11% 20% 5% 5% 7% 10% 0% 0% 0% EXPE TRIP BKNG TCOM
Retail B2B Other
Source: FactSet
Source: IBIS World Similar to its peers, Expedia holds 90% of its revenue from retail revenue segment. Booking Holding has only 67% revenue comes The chart below shows the major players in this industry and from retail revenue segment, and 25% in B2B revenue segment. their respective market shares. The largest player in this industry Among competitors, BKNG exhibits a more diverse revenue is Booking Holding with 66% of the market share, according to stream and larger focus on B2B revenue. FactSet. Expedia Group takes 14% stake of market share in the industry, while TripAdvisor takes 18%, and Trip.com takes 3%. The chart below details firm’s revenue breakdown by regions, across EXPE’s competitors: Travel Agencies Industry Major Players in U.S. By Market Share Revenue Breakdown By Geographics
China, and 18% 14% 3% Expedia Group other Asain 120% Countries Netherland / and Europe 100% TripAdvisor 100% 90% 80% 57% 53% Booking Holding 47% 60% 43% 40% 66% Trip.com 20% 10% 0% 0% EXPE TRIP BKNG TCOM Source: FactSet, data as of FY 2019
Future Growth Prospects: Overall, our view is that the market U.S. International uncertainties and weaker economy post COVID-19 could potentially affect this industry’s performance moving forward. Source: Bloomberg Therefore, we forecast an average annualized growth rate of Compared with its peers, Expedia along with TripAdvisor have 2.5% in CV NOPLAT in our model which is aligned with IBIS the most balanced exposure to both domestic and international forecasted industry growth rate over the next five years [15]. markets, which could reduce the impacts if the U.S. COVID-19 cases worsen going forward.
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Revenue Breakdown by Services and packaged tour bookings. Hence, Trip.com has the 100% lowest year-to-date EV/EBITDA. 91% 90% • Dividend Yield : All the key players in the industry currently 80% 70% has 0% dividend yield amid the effect from the pandemic. 70% Many travel industry companies are trying to reserve 60% 60% financial liquidity, so the key players in this industry has cut their dividend payout to zero. However, we expect this 50% 40% 39% dividend payout to slowly recover for the next five year. 40% Therefore, we project a 6% decline in dividend payout for 29% 30% 2020 fiscal year in our model [3].
20% 13% 10% • ROE and Operating Margin : Booking Holdings has the 7% 10% 8% 10% 5% 6% highest ROE and operating margin because it has the least 1% 0% 0% 0% exposure to the U.S. market where number of COVID-19 is EXPE TRIP BKNG TCOM the highest. In addition, it is also the least exposed to Hotel booking cancellation and refund risk. Therefore, Booking Holding outperformed the industry in both of these metrics. Airline
Rental Car Target Market: EXPE has similar target customers as its
Other (adviertising, experiences & dining, and packaged tour & corporate travel) competitors. Its target market includes retail customers with travel needs, corporate travel customers, and travel companies Source: FactSet, Data as of Fiscal Year of 2019 who need a platform for their advertisement.
Compared to its peers, Expedia has the second highest hotel Industry Life Cycles: This industry is at mature stage, according reservation revenue breakdown. Expedia also has the second to IBIS World [15]. In addition, it is expected that this industry’s highest exposure to airline booking. Since Trip.com operates revenues to decrease at an annualized rate of 4.2% over the next 100% of its business in China and other Asian countries where 5 years, which is also the assumption captured in our financial the pandemic has recovered faster than the western world, we model. As a result, this industry is expected to slow down expect high exposure to airline services will have less effect on compared to US GDP over the next 5 years. Moreover, this Trip.com. industry faces heavily price-based competition, even big companies like Expedia can be replaced by smaller companies Relative Metrics: From the table below, we see TripAdvisor has who offer cheaper prices to customers. In addition, companies the highest EV/EBIDA, and Booking Holding has the highest in this industry also have high expense ratio that is correlated to return on equity, and operating margin. Expedia has the lowest the services they are providing to clients. Therefore, we see return on equity and the second lowest operating margin among Expedia to increase its cost structure in order to compete with its peers. smaller companies in this industry. This will materially reduce the company’s profit and reduce the benefit of holding Expedia’s Ticker EXPE TRIP BKNG TCOM shares. EV/EBITDA -31.7x 100.6x 16.0x -451.4x Dividend Yield 0.0% 0.0% 0.0% 0.0% On the other hand, this industry is also heavily based on consumer disposable income and demand in travel. For the ROE -32.5% -8.3% 54.7% -3.1% Operating recent activity of COVID-19, we see a sharp decline in the -3.3% -5.1% 29.0% 0.0% Margin (ttm) number of international and domestic trips as various countries Source: Yahoo! Finance, data as of 11/5/2020 have imposed strict travel regulations and limited the number of flights. According to IBIS World, the number of international and • EV/EBITDA Ratio : TripAdvisor has the highest EV/EBITDA domestic trips will decrease 61% and 45% respectively in 2020 because the majority of its revenue stream comes from [15]. This impact of COVID-19 on the travels are unknown: the hotel advertisements. Thus, when comparing to other key longer the pandemic lives with us, the slower the demand for players in this industry, they are subject to lesser risk in traveling would be returned to pre-pandemic level. cancellation or refund pressure from customers who are worried about travelling due to COVID-19. On the other Overall, on the relative metrics, we see Booking Holdings hand, Trip.com faces the most pressure on cancellation on standout in the industry with its least exposure to U.S. and as a trips and refund pressure because 90% of its revenue comes result less cancellation and refund risk. from transportation ticketing, accommodation reservation,
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ECONOMIC OUTLOOK Therefore, we believe that we are now in a recession with slow recovery. If the unemployment rate remained elevated, we Expedia’s business comprises of mostly travel booking expect to see more people losing jobs and saving more. For this reservations. Therefore, during this unprecedented time, it will reason, we believe the travel industry will take longer than be crucial to monitor the macro environment measured by expected to recover. unemployment rate, consumer sentiment , and availability of effective COVID-19 vaccines. Consumer Sentiment Unemployment Rate Historical Consumer Sentiment
The official unemployment rate fell to 6.9% in October as businesses continue its gradual recovery out of the broad shutdowns that were imposed following the COVID-19 pandemic. Starting from April 2020, economy hit the peak of unemployment rate of 14.7% [22]. The unemployment rate has been trending downwards but remaining high. Even though the unemployment number is lower than the level in April 2020, the current unemployment rate is still considerable higher than last year. Source: Trading Economics The chart below shows the unemployment rate from 2008 to October 2020: From the graph above, we can see consumer sentiment has dropped sharply after March 2020. The pandemic has added tremendous fears in people’s lives, and the recent rising cases of COVID-19 infection and death rates has further lowered the demand for people to travel. However, we do see the economy to rebound back to 2019’s level on the foreseeable future. If the number of COVID-19 cases continues to rise in U.S., we expect the economy to take longer time than expected to catch up. In order to track the economy, it is critical to follow consumer sentiment since this industry is heavily based on how consumers believe in the market and their confidence on travelling.
Effective COVID-19 Vaccination Source: CNBC We believe the availability of COVID-19 vaccines will improve the The GDP growth accelerated at a 33.1% annualized pace in the traveling demand in this industry. Vaccine development is a third quarter of 2020 which was better than the 32% estimate, lengthy and expensive process. It usually takes multiple and the prior quarter was negative 31.4% growth. candidates and many years to produce a licensed vaccine. According to the New England Journal of Medicine, when a pandemic started, the vaccination development time shorten and increase risk to developers on whether the vaccine will work. In addition, as the coronavirus is a virus that the world has not yet seen before until this year, it is difficult to develop effective vaccines to public. Even if the vaccines are developed, it is difficult to know how long the immunity will last. Usually, when a vaccine is licensed and readily available to the public, we will only have information about the immune response up to 5 months after vaccination. So, it is possible that even after vaccination, people could soon lose immunity after 5 months or less. On 11/9/2020, Pfizer has just announced its COVID-19 is more than 90% effective, but the actual date of availability to the public is still unknown [22]. Source: CNBC
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Furthermore, we are seeing more health care companies now Within the industry, the average company’s P/E multiple for rushing the COVID-19 vaccine development. We worried even if 2020 is 9.6x, and 39.1x for 2021. EXPE is currently trading at – the COVID-19 vaccines are developed over the next few months, 8.4x P/E of 2020 and -263x P/E of 2021, which is undervalued people will be hesitant to get it. than its peers [3]. However, given most of EXPE’s peers have negative P/E multiple, the relative valuation model is not an The graph below shows people have become less willing to get accurate presentation of EXPE’s target price. Therefore, in our vaccinated across all different groups of people: target price consideration, we used both DCF and DDM models. Both DDM and DCF models estimate approximately 16% potential upside. We believe the potential reward from holding Expedia Group is less than the risk of prolonged weak economy around the world.
Therefore, we recommend a No Action rating for Expedia Group, Inc. Assumptions
When building the DCF model, several assumptions were made based on the key economic trends and industry outlook.
CV NOPLAT Growth Rate: In our model, we projected a 2.5% CV year net operating profit less adjusted taxes (NOPLAT) as we expect the economy to be slowly recovering from COVID-19 outbreak. This estimate has also incorporated the forecasted annual average consumer spending growth rate of 2.5% that we researched from IBIS World [15].
Retail Revenue Growth Rate from 2021-2024: We forecasted an annual average growth rate of 9% in the retail revenue which is lower than the historical annual average growth rate due to slow recovery in consumer spending. EXPE, as one of the large players in this industry, will benefit from its well reputation in Source: Pew Research Center travel recommendation once the economy fully recovers from the pandemic. In addition, the company also has 43% of its Therefore, even though we expect COVID-19 vaccine to be revenue comes from international markets such as Asian market available next year, we are not expecting people to start getting where the pandemic has been improved and under control. This it until they have seen a majority of people getting vaccinated will pose a better position compared to its peers as Asian and show effectiveness. For this reason, we believe it is critical economy recovers faster than the western countries. Hence, we to track people’s wiliness in taking COVID-19 vaccines and the forecasted a 9% annual average growth rate, which is 4% lower effectiveness of COVID-19 vaccines. If the vaccines become than the company’s historical average growth rate. available, and people are willing to take it, then we expect more improvement in the travel industry as people will have less fear B2B Revenue Growth Rate from 2021-2024: We forecast this in traveling then. segment revenue to grow at a rate of 6% lower than the company’s historical average of 10% as most companies are now VALUATION working from home and cutting travel costs. This will result in less demand in business trips bookings going forward. According to DCF and DDM models, it is estimated that the stock Cost and Margin Growth: In general, we projected an average price target for Expedia Group, Inc. is between $111 - 136 annual growth rate in gross margin of 82% driven by 8.5% According to Relative Valuation analysis, comparing with EXPE’s growth in total revenue going forward from 2022 – 2024. In key competitors including TripAdvisor (Ticker: TRIP), Booking 2020, we forecasted a 25% decline in total revenue to reflect Holdings (Ticker: BKNG),and Trip.com (Ticker: TCOM), the sharp decline in travel demand. In 2021 forecast, we projected a conclusion is below DCF and DDM models because most of 18% growth rate to reflect slow recovery. We expect the EXPE’s peers have negative estimate EPS for 2020 - 2021. economy continues to stay in slow recovery going forward, thus we expect total revenue to grow at slower than historical
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average annual growth rate of 8%. On the other hand, as the From all of assumptions above, we estimate a target price of company continues to face slower revenue growth, we expect $111 using DCF/EP, and $136 using DDM models [3]. Particularly, the company to cut costs in order to preserve cash. Though we we believe that DCF model shows more perspectives on EXPE’s expect the company will still have to incur necessary cost such fundamental metrics. While DDM, based on the operating as software maintenance, restructuring, and others, this will not metrics, shows more growth in EXPE’s dividends. We relied more sum up to a large amount. As a result, we expect lower growth on both DCF and DDM since most of EXPE’s peers have negative rate of 9% which is lower than the historical annual average P/E multiple causing the target price of EXPE to be negative. To growth rate in operating expense going forward [3]. summarize, the target price for Expedia Group is between $111 to $136 with a potential upside of 16% [3]. Cost of Capital Assumptions: Driven by low interest rate environment and using Henry Fund estimated equity risk KEYS TO MONITOR premium, we calculated a 9.3% cost of equity, after tax cost of debt of 3.19%, and 7.8% weighted average cost of capital. The Overall, we recommend No Action for Expedia due to its 16% Company has 76% common equity , and 24% debt in its market potential upside driven by slow economy recovery post the value. pandemic, steep decline in consumer spending, and intensified Technology & Content Expenses as % of Sales: We forecasted a industry competition. 3% higher than historical average growth rate of 17% annual growth rate in technology and content expense. Given the Bull Case $136 : We project a $136 target price in the case when intense price-based competition in this industry, we expect the economy starts to recover from the COVID-19 outbreak and there will be needs to upgrade Expedia’s software and algorithm demands in travelling services pick up again. For example, in in order to provide competitive and comprehensive price search the next 12 months, effective vaccine could be available to the experiences for customers [3]. public and the majority of people are willing to be vaccinated. Earnings Estimates Relative to Consensus: We forecasted a $- In addition, Expedia’s leading digital platform has positioned 13.9 EPS in 2020, $-0.45 EPS in 2021, $3.88 EPS in 2022. In the well in the industry, along with its ongoing growth in Chinese meanwhile, the consensus’s projected a $-8.65 EPS in 2020, $- traveling market (faster economy recovery than the U.S. 0.38 EPS in 2021, and $3.96 EPS in 2022. Our estimates slightly market). lower than the consensus because we are more pessimistic on the economy recovery. We expect not a lot of people will be Bear Case $111 : We project a $111 target price in the case willing to get vaccinated when the vaccines are widely available when number of COVID-19 cases continues to increase and to public since people are afraid the risk of the vaccine not holds back the economy recovery. On the other hand, the working. industry faces more price-based competition. If this industry Debt Maturity: EXPE has total debt of $9,766mm with average continues to see more companies entering into the market, maturity of 4.67 years. Each year from 2022-2030, the average Expedia will have to improve its algorithm that captures better debt at maturity is around $1221mm [5]. Average debt rating is deals and booking information, which will result in higher BBB- /Baa3 rated by S&P, Moody’s and Fitch. The chart below technological cost in order to maintain its current position in shows Expedia debt maturity each year from 2020-2050: the industry.
Debt Maturity REFERENCES
1. Yahoo! Finance 2. Net Advantage, Online Travel Agencies Industry Metrics 3. HF EXPE Financial Model 4. Forbes Website, How Google has become the biggest travel company 5. Bloomberg Terminal 6. EXPE’s FY 2019 10K 7. FactSet 8. eMarketer, Travel Industry Digital 9. Trading Economics, U.S. Consumer Spending 10. EXPE’s 10Q, 2Q 2020 11. Statista, Travel & Tourism Statistics Source: Bloomberg
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12. PhocusWire, Expedia Group Q3 “Better than Expected” Vrbo up YoY 13. Hospitality Net, travel spending in U.S. to plunge 45% This Year 14. The New England Journal of Medicine 15. IBIS World, Travel Agencies in the US 16. Bureau of Economic Analysis 17. MarketWatch 18. NASDAQ.com for Consensus EPS 19. Bureau of Labor Statistics 20. Expedia Group’s Q3 2020 Results 21. Expedia’s Website 22. CNN Business 23. Fornova, Percentage of Metasearch IMPORTANT DISCLAIMER
Henry Fund reports are created by graduate students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.
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