Can Expedia Stock Offer More Upside?

Expedia’s stock (NASDAQ: EXPE), a travel company providing everything from airline tickets, hotel rooms, car rentals, to cruises, is more than 3.5x higher from the March 2020 lows of around $49 (when broader markets made a bottom due to the spread of Covid-19) to $176 currently. In fact, the company’s stock is now 43% above its pre-pandemic high of roughly $129 (Feb 2020). Now, are further gains likely for EXPE stock? We think that the company remains overvalued at a price-to-sales ratio of 5x, and could likely see a downward correction based on its historical multiples in the long term. The fact of the matter is that the company was struggling with the increasing pressure from Google
GOOG
in advertising, and from nimble startups such as Airbnb, even before the pandemic. Expedia
EXPE
had to take on lots of additional debt to get through the current cash-burning period – making its total debt load stand at more than $8 billion. Additionally, with the Covid-19 cases still surging, it looks like Expedia will be a more heavily indebted company when all this is over. Needless to say, growing competitive threats and a heavy debt load could result in Expedia’s stock price declining in the longer term.

Expedia stock has underperformed the broader markets between fiscal 2018 and now. The company’s stock is around 56% higher than it was at the end of fiscal 2018, compared to 66% growth in the S&P. Our dashboard, What Factors Drove 56% Change in Expedia’s Stock Between Fiscal 2018 and Now? provides the key numbers behind our thinking, and we explain more below.

Expedia’s stock grew 18% from around $113 at the end of fiscal 2018 to around $132 at the end of fiscal 2020. While the company’s revenue per share declined a sizeable 50% during this period – thanks to the pandemic restrictions, the company’s stock price climbed at the end of fiscal 2020 on the optimism of vaccine trial news. It should also be noted that Expedia’s P/S was around 1.5x during the 2018-2019 period. It appeared higher in 2020 as the reported drop in RPS led the P/S ratio to appear higher at that point. The company’s P/S ratio grew from about 1.5x at the end of FY 2018 to 3.5x at the end of FY 2020. While the company’s P/S is about 5x now, there is a downside risk when the current P/S is compared to levels seen in the past year.

How Is Coronavirus Impacting Expedia’s Stock?

The travel sector was beaten down in 2020 as the onset of the pandemic led people to stop traveling, forcing travel companies such as Expedia to close global offices and eliminate a quarter of their workforce. As evident, Expedia’s revenues declined a whopping 57% year-over-year (y-o-y) in 2020, largely due to a 66% y-o-y decline in its gross bookings. In addition, the company’s earnings per share came in at a loss of $19.00 in fiscal 2020, compared to a profit of $3.84 in 2019. Going forward, the company needs to address its $4.6 billion negative free cash flow in 2020 that compares to $1.6 billion in positive free cash flow the previous year. So, it needs to generate at least $6 billion to return to normalcy. While Expedia still has $3.36 billion in cash and $2 billion in a revolving line of credit, reducing its large debt will rely heavily on the company’s post-pandemic recovery. With many parts of the world still into lockdowns, Expedia will continue to see a difficult time in the near term as the business environment still looks uncertain.

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