Expedia's stock punished as analysts warn of 'more uncertainty'

By Claudia Assis

BofA cuts rating on Expedia's stock to hold; stock drops more than 20%

Expedia Group Inc.'s stock on Friday headed for its lowest in nearly three months after Wall Street cast doubt on the online travel company's immediate future amid a surprise CEO change.

Expedia (EXPE) late Thursday reported a quarterly beat, but spooked investors by announcing that Chief Executive Peter Kern is stepping down in May. Kern will be replaced by Ariane Gorin, who most recently served as president of Expedia for Business.

The stock is on track for its lowest close since Nov. 14, when it closed at $122.63, and looking at its largest one-day percentage drop since March 16, 2020, when it fell 21.44%. It was the worst performer on the S&P 500 index SPX.

Ultimately, Expedia has "a lot to work through" in the first half of the year and faces "more uncertainty" this year with the CEO change, BofA Securities analyst Justin Post said in a note Friday. Post downgraded his rating on Expedia's stock to the equivalent of hold.

"We see a few new overhangs on the stock that could limit multiple expansion and performance vs peers," he wrote, including a longer-than-expected recovery for Expedia-owned vacation-rental company VRBO, a growth strategy that includes higher marketing spending in international markets where competitors are strongest, and a CEO departure that added to the execution challenges that the company is facing.

"We would look for better evidence of VRBO recovery and One Key benefits to get more constructive on the stock, along with less perceived guidance risk," Post said.

One Key is Expedia's new loyalty program, launched last year, that unifies customer rewards for its main brands, including VRBO and Hotels.com.

Other analysts were more sanguine about the CEO change. It came as a surprise, but the transition is likely to be smooth given Gorin's background and experience, Naved Khan with B. Riley Securities said in his note.

Kern "effected a successful turnaround since taking over as CEO in 2020 and hands over the reins to an experienced [executive]," he said. "Overall, we're positive on the succession."

Khan's optimism on Expedia includes the company's above-market growth rate and margin expansion projected for this year, reduced costs, strength in the business-to-business segment, and accretion from an "aggressive share" buyback program.

Jed Kelly at Oppenheimer also had a more positive on Expedia, saying that he'd "take advantage of any share price weakness" after the company's guidance implied bigger margins on higher operating efficiencies and revenue growth of about 10%.

While the CEO change added "an extra layer of complication," there was something for bears and bulls in the company's latest quarter and guidance, UBS analyst Stephen Ju said.

"Expedia remains a self-help execution story, with major product updates (such as One Key) rolling out in 2024 that can change its gross bookings, revenue, and profit growth trajectories," Ju said.

"The likelihood for success or failure of these initiatives in our view depends on management. And the CEO change announced concurrently with earnings ... during what is a pivotal year for Expedia as it switches to offense, does give us an additional reason to wait for incremental signs that the company can deliver on guidance parameters."

Ju kept his rating on Expedia shares at the equivalent of neutral.

On the plus side, Expedia is gathering more traffic and transactions from businesses, making it less reliant on online searchers and bookings, and is being "more agile" in terms of product development, among other positives.

For the bears, however, there's the fact that the company faces uncertainty regarding the return on investments made on One Key and there's the likely increase in marketing to drive its global expansion, plus the CEO?change "amidst a crucial period for execution and new product rollout."

Shares of Expedia are up 11% so far this year, compared with an advance of about 23% for the S&P. The stock has had a rough start to the year, down 14% so far, contrasting with gains of more than 5% for the broader equity index.

-Claudia Assis

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02-09-24 1319ET

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