New Consumer Features And AI Innovations Drive Success Amid Global Expansion

Key Takeaways

• Focus on consumer products, international expansion, and AI-driven enhancements could grow bookings, capture market share, and improve efficiency.
  
• Strong advertising, B2B growth, and share repurchases may boost revenues and increase earnings per share.
  
• Weather, currency headwinds, and pricing pressures pose challenges to Expedia's revenue and margins, amid marketing investments and leadership changes impacting financial stability.

Catalysts

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

• Expedia's focus on expanding and improving its consumer-facing products, like new features for Brand Expedia and enhancements to the Vrbo app, aims to drive growth in direct bookings and improve user experience, potentially increasing future revenues.
  
• The company is seeing strong performance from its advertising and B2B sectors, which are outpacing the industry with double-digit growth. This indicates potential for robust revenue growth as these segments continue to scale.
  
• International expansion efforts, with bookings growth accelerating outside the U.S., particularly highlight potential to capture market share and increase revenues in faster-growing markets.
  
• The development and implementation of new technology and artificial intelligence applications, like improving conversion through AI-powered product features, aim to enhance customer experience and operational efficiency, potentially improving net margins through cost savings.
  
• As Expedia continues to execute its share buyback program, with $3.2 billion remaining for repurchases, this could lead to increased earnings per share if undervaluation allows for the stock to be repurchased at favorable prices.

Expedia Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Expedia Group's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 10.7% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $14.61) by about November 2027, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.8x on those 2027 earnings, down from 21.3x today. This future PE is lower than the current PE for the US Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Expedia Group Future Earnings Per Share Growth

Risks

• Despite exceeding expectations on gross bookings and earnings, Expedia Group faced weather and currency headwinds, which can impact revenue and profit margins.
  
• Continued pricing pressure in air and car travel sectors suggests potential revenue challenges, despite a recent uptick in air ticket prices.
  
• Marketing investments in Vrbo and international markets are affecting sales and marketing leverage, potentially impacting net margins if returns are not realized promptly.
  
• Leadership changes, such as Julie Whalen stepping down as CFO, could introduce transitional risks that might affect financial stability and investor confidence.
  
• Third quarter revenue margin was approximately 50 basis points lower year-over-year, suppressed by prior pricing actions and lower-margin air bookings, which could impact overall earnings growth.

Valuation

• The analysts have a consensus price target of $184.25 for Expedia Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $225.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.4 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 8.0%.
• Given the current share price of $177.06, the analyst's price target of $184.25 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.