- Expedia shares have been selling off after the company badly missed earnings estimate during its latest earnings call.
- The lower-than-expected earnings were orchestrated by the company's integration costs.
- This is a temporary headwind and Expedia is likely to record better profitability in 2016.
Expedia (NASDAQ:EXPE) stock has been selling off quite heavily ever since the company reported a huge earnings miss during its Q4 2015 earnings call. Expedia posted fourth quarter non-GAAP EPS of $0.01 with GAAP EPS of -$0.09 being 24.1% below consensus estimates. In fact Expedia is ranked #10 among S&P 500 companies that posted the worst earnings misses during the current earnings season. Expedia’s earnings declined 10.5% compared to the prior year’s comparable period.
Expedia blamed the loss on its recent acquisition of HomeAway and Paris attacks. The company said that HomeAway integration costs of $14M hit the company’s EBITDA.
Expedia is a very acquisitive company, having spent $6B in 2015 alone in strategic purchases of companies in a bid to remain competitive, with the likes of Priceline (NASDAQ:PCLN) and AirBnB hot on its heels. Expedia’s high acquisitive appetite, however, has quite a few downsides. For instance, the company’s operating costs have been rising significantly faster than its top line growth. In 2012, Expedia spent 42.7% of its revenue on marketing costs; in 2015, that figure had climbed to 50.7% of sales. That’s definitely not a good trend considering that Priceline’s S&M costs were just 36.5% of revenue in 2015.
Online Travel Agents (OTAs) such as Expedia and Priceline usually allow the companies they buy to continue operating independently so as to avoid diluting the strength of their brands. But this modus operandi unfortunately means that their marketing and administrative costs remain high.
Expedia’s M&A strategy, however, appears to be paying off. The company recorded strong bookings growth during the last quarter, with bookings growing 32% Y/Y to $14B. Expedia’s core travel agency business recorded a strong 44% growth in bookings to $13.6B while Egencia, the company’s corporate travel business, posted 13% bookings growth.
Expedia’s lower international exposure compared to Priceline has also been helping the company maintain healthy top line growth. Only 35% of Expedia’s revenue came from international markets in 2015 compared to 89% for Priceline. Expedia’s dollar denominated sales has a big upside to it: during the fourth quarter, the company posted top line growth of 25% to $1.7B compared to 8.7% revenue growth to $2B at Priceline. Priceline’s gross bookings growth of 13% to $12B was also much less impressive than Expedia’s.
Investors should take note of the fact that Expedia issued good 2016 earnings guidance. The company said that it expects 2016 EBITDA to clock in 35%-45% higher than 2015 with HomeAway and Orbitz, its largest acquisitions in 2015, contributing $275M-$375M, or 21%, to that metric. This is a good sign that the two acquisitions will add considerable shareholder value going forward. It appears as if Expedia frontloaded most of its integration costs related to its mergers and the company stands a good chance to return to profitability during the current year.
Expedia sold more than 60% of its stake in eLong, a Chinese OTA, in 2015. The Chinese online travel space is highly competitive which has led to losses for most players. Prior to the divestiture, eLong had been weighing heavily on Expedia’s bottom line. Expedia sold the eLong stake to Ctrip (NASDAQ:CTRP), one of the largest OTAs in China, and entered into an agreement with Ctrip that will allow Expedia to benefit from inbound travelers from China.
Expedia stock has been very volatile lately with the shares down 10.6% YTD. It appears as if the market is shunning the shares due to Expedia’s recent bottom line miss which is mostly related to integration costs of its newly purchased businesses. But Expedia’s healthy EBITDA guidance for 2016 suggests that the company charged most of those costs in 2015 and 2016 is likely to be more profitable. This is a good time to buy Expedia stock while the stock is still beaten down.