Expedia Earnings: Past Investment Pain Now Turning to Financial Gain; Shares Very Undervalued

Expedia EXPE shares traveled 10% higher in afterhours trading on strong third-quarter results, which we think supports our view that market concerns regarding sales and marketing expense are misguided. We see shares of this narrow-moat company as meaningfully undervalued and think that its forward EV/EBITDA multiple of 5 times can rerate to around 8 times, near its prepandemic marks, as Expedia investment headwinds turn to tailwinds in 2024. We don’t expect a material change to our $175 fair value estimate.

Expedia’s bookings accelerated to 7% growth from 5% last quarter, surpassing our 5% estimate despite the fires in Maui, turmoil in the Middle East, and some final disruption in converting the Vrbo brand to its unified stack. Importantly, business-to-consumer segment sales growth reaccelerated over 400 basis points from the last quarter as the temporary impact of migrating brands to a shared platform in the past few quarters has concluded.

Meanwhile, the business-to-business division, which has not been disrupted by the technology transition, posted robust sales growth of 26%, showcasing that Expedia’s network advantage is intact. Further, the company remains well-positioned for revenue growth in 2024 and beyond, as engineers shift back to the core task of optimizing a now stronger platform that shares data, loyalty, supply, and marketing expertise.

Expedia also continues to see margin expansion, growing EBITDA margins 110 basis points from a year ago to nearly 31%. We were encouraged to hear that Expedia saw marketing leverage in its B2C business, which signals that past headwinds from migration efforts are turning to tailwinds of platform efficiencies. The company remains optimistic that its enhanced network can drive double-digit sales growth with EBITDA margin expansion in 2024. Still, we plan to maintain our 7% revenue growth forecast for next year, due to slower economic growth from lasting inflation and exhausted consumer savings.