While Expedia hasn’t offered its stockholders much to get excited about over the last couple of years, Dan Wasiolek sees some real potential with this travel stock.
Expedia at one time had the online travel jungle virtually to themselves, back in the early days of travel sites. They started as a division of Microsoft back in 1996, and while they were eventually spun off, they certainly hit the ground running and got a real head start on the competition.
This jungle is a lot more crowded these days, evidenced by so many of their competitors making themselves very visible. Expedia has been able to hold their own over the years and they well understand that you have to spend a lot of money on advertising in this arena to do that.
They have remained right around the top, and over the last 10 years, the graph of their revenue growth is a thing of beauty. They have increased revenue substantially each year, starting from $2.74 billion in 2009 and bringing this number all the way to $11.22 billion in 2018.
Expedia spent $3.5 billion of their income to buy advertising on Google alone last year, which gives us a taste of how big pay-per-click advertising is in this business. The model has been to ramp up the advertising as the business grows and use that to leverage further revenue.
You can only do so much advertising before you get diminishing returns, but with pay-per-click, you can use extra money that you earn to outbid your competitors and get better placement on search engines, and being ahead in search engine rankings is a very big deal.
Dan Wisiolek, an analyst with Morningstar, has just come out with a recommendation of Expedia as a good long-term choice. We should never just take an analyst’s word on a stock though and we owe it to ourselves to go deeper, since it is our money on the line.
If We’re Picking Stocks, We Need to Seek to Pick the Better Ones
The first thing that we want to keep in mind whenever we are considering a stock to buy is that it is not enough for a stock to have a bullish outlook for us to want to buy it. Large institutional investors do need to spread things out a lot and they can’t just go with a few stocks, the cream of the crop in other words, for various reasons, and therefore can’t be anywhere near as choosy as we can.
There’s only so much stock you want to buy with a company, and if you have billions to spend, you’re going to need to look at a bunch of stocks and pick the ones that are good enough to make it to a pretty large list. Even someone like Warren Buffet, who often will buy a very large piece of a company or even the whole thing, still needs a big list of stocks that he has positions in.
We could just invest our money in just one stock if we wanted to, without any trouble, even if we have a few million to invest. This doesn’t mean that we want to be doing that necessarily, and investors do like to spread things around some, although most actually make the mistake of spreading it around too much, acting like someone who has several more zeros added to their portfolio size.
Some people will invest in an index fund, and that can be a reasonable strategy for those who don’t want to bother with either picking their own stocks or timing them, but for those who are looking to build their own portfolios, and especially with those who are willing to move things around as indicated, we can really help ourselves by holding the right stocks at the right times,
Anyone who pays attention to stock recommendations has at least the desire to do one of these things if not both, we do need to look at both the value of an investment in itself as well as the opportunity cost of investing in it versus something else. There may be better stocks out there in other words and beyond our being overly exposed to certain sectors, we don’t want to use the strategy of diversification to overly water down our returns.
As it turns out, while Expedia may be able to increase their cash flow significantly as Wisiolek suggests, we have to ask ourselves whether this will matter enough to take them from where they are now, a market laggard, and propel them into the upper echelon of the choices that we could be making here.
It’s not a bad idea to look at the expectations for a company when we are looking to invest in it, especially if we expect to stay in it longer-term, but while the company has grown pretty impressively over the years, this just isn’t translating to their stock price all that much.
Expedia hasn’t just had very good revenue growth over the last 10 years, they’ve also improved where it really counts on the fundamental side of things, which are earnings per share, over the past two years. They have moved from $1.82 per share in 2016 to $2.42 in 2017, and up to $2.65 in 2018, so that part looks positive.
Expedia May Still Look Positive but Lacks Excitement
They did make $5.99 per share in 2015 though, a record for the company, so we might want to look back upon that and wonder when they may even get back to this point, let alone forge ahead in a way that might want us to get excited about this stock to want to own it long-term.
The competition in the travel sites business has really picked up, and this drop-off may be reflective of a company that is having a harder time making money now in the face of more people slicing up the same pie. Off-hotel bookings through agencies such as AirBNB have exploded and now make up 20% of all bookings, and while Expedia is looking to venture into this off-hotel booking world, but thus far, their results have been unimpressive and even the company is disappointed.
There’s also a new name in online travel, a monster named Google. When Google gets into the travel business, they don’t do this half-hearted, and they have both the traffic and the resources to make their presence very well known. Google also has brought a lot of innovation to this field, and while competitors may be able to offer the same things, Google not only dwarfs their competitors, they own a lot of the traffic that all these other companies are battling over.
Google still provides preferential treatment to their paid ads, which appear ahead of Google’s travel services in the search results, but companies like Expedia have set to complain about the very fact that Google is doing business at all on their own sites and are hoping that this will be seen as a restraint of trade.
We could say that Expedia and others are out-bidding Google’s ads right now, and Google does not have any obligation to put the paid ads ahead of their own, but Google is still getting business and Expedia is objecting.
They are hoping that the government will prevent Google them from competing with them on Google’s own sites, but this would be asking us to not prevent restraint but proactively restrain a company, and take away a company’s ability to monetize its own traffic, so don’t bet on this making it too far in the courts even if it does get off the ground politically.
Wisiolek also points out that Expedia is only trading at a price to earnings multiple of 17, versus the 20 that they have been accustomed to in the past. All this means though is that people don’t think as much of their future prospects than they did at one time, which is by no means a good thing.
What the market thinks of a stock is displayed in pictures on its chart, and this chart looks anything but promising. It made it up almost to $160 two years ago, but hasn’t been back there since. It’s stuck in a range right now, and while it is up a good amount for the year so far, overall the picture isn’t such a great one.
It has lagged the market significantly over the last 2 years, and is still down quite a bit over the lthis time even with the nice rally the stock had in June. It had actually given back almost all its yearly gain in May though, 12% compared to the market’s 6%, so this appears to be a stock that people are less likely to jump on but more likely to jump off when the heat gets turned up a little.
Even though Expedia’s earnings have been good overall, they experienced their first quarterly loss since 2008 last quarter. This is just one quarter but this sure does not look like the type of business momentum that should have people calling their brokers.
We’re also in an area that has a fair bit of resistance, where we’ve tried to break out of the area where the stock is now several times before over the last 2 years and each time the stock has failed to break through and test the 2 year ago level. A lot of investors may think that this certainly doesn’t mean very much, or anything, but since it does represent a real hesitancy of the market to take this higher, this at least tells that story.
Expedia had a higher multiple at a time where the future looked exciting, but it looks less so now. This is clearly a below-average stock right now, and we really should not even consider such things, because there are better choices by definition, including anything with above-average prospects.
For those already in the stock, they also may want to look for greener pastures even though this one really doesn’t look all that bad, at least yet. While few investors would want to sell something up 19% in a little over 6 months, and usually will only consider selling if a stock gets truly hammered, if things do turn south with stocks, this might be one of the ones that may be hit harder than average, as it did in May..
The Nasdaq is up 24% so far this year though, and you could have therefore bought the whole index and beat 19% pretty handily. If we’re going to pick stocks, we at least need to get to random before we get too happy.
Expedia may end up going from underperforming the market at some point in the future, but it’s an underperformer now, and will have to show signs that it is actually getting better before it really deserves a serious look.