Logic is often overrated in the stock market, which looks ahead and moves up and down at least as much because of psychology and investor perception as cold, hard facts. Expedia Group (EXPE) is a good example of that, explains Mike Cintolo, editor of Cabot Growth Investor.
The firm is one of (if not the) largest travel firms out there, operating many popular sites (including Expedia.com, Hotels.com, VRBO, Orbitz, Travelocity and many others). Anyone who has traveled at all in the past couple of years knows it’s been boom times, with flights and hotels full (and prices up).
Indeed, Expedia’s bottom line has recovered in a big way since the pandemic and should notch a new high near $8.50 per share soon. Free cash flow should come in even larger, likely around $15 per share for 2023.
That’s thanks to industry-wide conditions, yes, but also some company-specific offerings. They include a rapidly growing business-to-business platform (with revenue up 26% in Q3, that segment made up one quarter of the total)
The company also has a unified loyalty offering. It’s dubbed OneKey and it allows people to earn and spend rewards on/with any of Expedia’s brands. All brands have now been migrated to a similar-looking app, which means the benefits of a couple of years of hard work should boost things even more going ahead. Analysts see earnings up another 26% in 2024 to $10.66 per share.
Despite all that, the stock has been completely waterlogged. It fell more than 60% from peak to trough in 2022. Then even as results have cranked ahead, shares were sitting in the low 90s in late 2023, well within the long bottoming pattern the stock carved out for more than a year.
But since the Q3 report, the stock has been starting to change character. EXPE gapped up 19% on the report and has rallied further since then. Clearly, this is a turnaround-type situation. Top-line growth is likely to run in the single digits while EBITDA expands in the low/mid-double digits.
But our bigger-picture thought is that EXPE can follow a pattern we’ve seen a lot in recent years: A stock or sector sees earnings explode, often because of some pandemic follow-on effects. Then after a run, the sellers arrive as investors expect earnings to fall back to Earth. Instead, earnings keep moving up, eventually leading to another big upleg as investor perception changes.
That seems to be in the cards here, with the cheap valuation, big bottom, and, now, real accumulation all offering encouragement. The fact that the top brass hasn’t been shy about buying back stock (share count down 8.7% from a year ago; new $5 billion repurchase announced) helps the cause, too.