APAC Partnerships And AI Investments Will Drive Operational Efficiency

Key Takeaways

• Investments in AI and new partnerships may boost operational efficiency, expand international revenue, and enhance customer experiences.
  
• Growth in advertising and recovery strategies for Vrbo and Hotels.com could significantly enhance earnings and revenue stability.
  
• Replatforming and strategic financial decisions may constrain long-term growth potential amidst competitive and market challenges.

Catalysts

Operates as an online travel company in the United States and internationally.

• The strong performance of Expedia’s B2B business, with notable growth in the APAC region and the addition of new partnerships, indicates potential for continued revenue expansion from international demand and exploring new partnership opportunities.
  
• Investments in AI to enhance customer and partner experiences might lead to improved operational efficiencies, potentially bolstering net margins by reducing costs and enhancing customer loyalty and engagement.
  
• Continued growth in the advertising business, with a 32% increase in revenue and innovations in ad products, presents a high-margin opportunity that could significantly contribute to future earnings.
  
• Increasing focus on operational efficiencies across the cost base, coupled with AI-driven productivity enhancements, is expected to contribute to margin expansion and improved earnings growth.
  
• The ongoing recovery and growth strategies for Vrbo and Hotels.com, including new product features and improved supply quality, are expected to drive revenue growth and improve earnings stability in these segments.

Expedia Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Expedia Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Expedia Group's revenue will grow by 8.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.0% today to 14.6% in 3 years time.
• The bullish analysts expect earnings to reach $2.6 billion (and earnings per share of $22.03) by about April 2028, up from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 15.7x today. This future PE is lower than the current PE for the US Hospitality industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 2.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Expedia Group Future Earnings Per Share Growth

Risks

• The reintegration of Vrbo and Hotels.com has faced challenges, including a loss of travelers due to replatforming that could harm future bookings growth, impacting overall revenue.
  
• The company's guidance for the first quarter of 2025 indicates a slowdown compared to Q4 2024, influenced by FX headwinds and seasonal shifts, which could result in lower than expected top-line revenue growth.
  
• Vrbo and Hotels.com are still recovering from setbacks, and the company's ability to sustain their turnaround remains uncertain, potentially impacting growth in net margins if further costly investments are needed.
  
• Expedia Group's relatively slow growth expectations for 2025 in gross bookings and revenue, at 4% to 6%, suggest challenges in accelerating earnings growth amidst competition and market conditions.
  
• The reinstatement of dividends and continued share repurchase program, while beneficial for shareholder value, may limit the resources available for strategic investments, potentially restricting long-term growth opportunities, impacting both revenue and net margins.

Valuation

• The assumed bullish price target for Expedia Group is $236.43, which represents one standard deviation above the consensus price target of $208.22. This valuation is based on what can be assumed as the expectations of Expedia Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $290.0, and the most bearish reporting a price target of just $143.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $17.5 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $150.53, the bullish analyst price target of $236.43 is 36.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.