Expanding Global Presence And Innovative Loyalty Programs Set To Boost Market Share And Profits

Key Takeaways

• Refocusing on the basics like traffic and conversion improvements is set to enhance room night growth, revenue, and profit margins.
  
• Significant international expansion and partnerships aim to increase gross bookings and diversify revenue streams, bolstering market presence in vacation rentals and B2B.
  
• Challenges such as international expansion pauses, market softness, pricing pressures, regulatory impacts, and investment returns could hinder Expedia's growth and profitability.

Catalysts

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

• The refocusing on basics and execution to accelerate growth in their consumer business, including improvements in traffic, conversion, attach rates, and marketing efficiency, is expected to improve room night growth and revenue, impacting both top-line growth and profit margins.
  
• The significant international expansion, such as the launch of Expedia point of sale in UAE and Saudi Arabia, along with improvements in their supply offerings, like the partnership with Ryanair, is expected to increase gross bookings and diversify revenue streams.
  
• The growth of Vrbo, driven by higher marketing spend, better supply, and product releases, particularly improvements in their app, could improve market share in the vacation rental sector, increasing revenue.
  
• The introduction of One Key loyalty program and its expansion, including the launch of a co-branded credit card with Wells Fargo and MasterCard, aims to enhance customer retention, increase repeat business, and could potentially improve revenue and margins through better customer lifetime value.
  
• The continued investments in the B2B segment, despite a slight deceleration, along with securing and renewing partnerships (e.g., Trip.com and Cathay Pacific), indicate potential for sustained growth in this area, contributing to overall revenue growth and margin expansion, especially with the addition of targeted investments in technology and supply.

Assumptions

• Analysts are assuming Expedia Group's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $14.14) by about August 2027, up from $808.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.0 billion in earnings, and the most bearish expecting $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2027 earnings, down from 21.1x today. This future PE is lower than the current PE for the US Hospitality industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 9.2% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Risks

• The pause in further international rollout of One Key outside the U.S. and U.K. could impact the growth and adoption of the loyalty program, potentially affecting customer retention and repeat bookings.
  
• Softness in demand seen in the third quarter, especially in the U.S., indicates a weakening market environment that could negatively affect the company's revenue growth and profitability.
  
• Continued pricing pressure for air and car bookings may lead to revenue and margin pressures in these segments, affecting the overall net margins.
  
• Headwinds from new pricing display regulations starting in July in California could impact the visibility and competitiveness of Expedia’s offerings, potentially affecting consumer business revenue.
  
• The company's investments in Vrbo and international markets, while intended to drive growth, could increase operational costs and impact EBITDA margins if the expected return on these investments does not materialize as planned.

Valuation

• The analysts have a consensus price target of $148.74 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 $200.0, and the most bearish reporting a price target of just $118.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $16.0 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $131.04, the analyst's price target of $148.74 is 11.9% 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.