Expedia: Why we are Underweight Despite a Good Quarter
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Expedia (NASDAQ: EXPE) reported its 2Q12 earnings with consolidated revenue and EPS of $1,040 million and $0.89 vs. Consensus estimates of 987 million and $0.71 respectively. Although the revenues and EPS were better than consensus estimates, we believe that Expedia will go down in the long run given its aggressive valuation among OTA groups and the increasing competition it faces from Priceline (NASDAQ: PCLN).
Key Takeaways from the last quarter:
- Worldwide hotel revenue increased 16% for the second quarter of 2012. Room nights grew 22% YoY to 30 million room nights, driven by 16% YoY growth in domestic room nights.
- Worldwide air revenues decreased 8% YoY, primarily due to an 11% decrease in revenue per ticket YoY.
- Acquisitions added roughly 2 percentage points of growth to revenues and gross bookings. There was also an $8 million revenue benefit from an out of period adjustment.
- Expedia allocated $521 million to share repurchases, acquisitions and dividends YTD.
Analysis:
~60% of Expedia's total revenue comes from the US compared to Priceline’s ~22%. We believe that it is a major concern given the high competition and low margins in the domestic markets. We believe Priceline is set to perform better than Expedia in the international OTA markets given its high coverage, with 235,000 hotels worldwide compared to Expedia’s 155,000 hotels and accommodations at the end of Q2. Although Expedia’s revenue mix moved towards international in Q2, we believe that Priceline has the upper edge in the international markets with its well tested and integrated agency model. While Expedia is trying to include the agency model in its offerings, we believe that it could potentially risk unit economics and free cash flow if not carried out well or if conversion ratios are unable to offset the lower unit economics coming with the agency model. Expedia allocated $521 million to share repurchases, acquisitions and dividends YTD. The 20 million share buyback would take around $900 million at the current market price. We believe that stock prices are inflated due to the positive market sentiment around this buyback. The market might be disappointed, as the expansion into international markets would result in increased CAPEX for Expedia and the pace of the buyback might be slower than expected.
Going Forward:
Expedia has so far gained ~60 % YTD, significantly outperforming the broader markets and much more so after the recent Q2 earnings report. We believe that the company is largely overvalued and faces tough competition in the OTA market. As Expedia tries to compete with well-established Priceline in the international markets, its spending is bound to increase in the near term. We believe that the stock is set for a major correction as the market catches up to the fundamentals, and therefore we maintain our sell rating on the stock.
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