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 Page 2 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.