Expedia Group

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Expedia Group is an online travel platform operating in a global market, connecting travelers with a wide variety of options for flights, accommodations, rental cars, and cruises.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Expedia’s core business revolves around serving as an intermediary, earning revenues through commissions and fees on bookings made through its platform. Its operations are extensive, spanning across several regions and customer segments.

Business Overview:

  • Revenue Distribution: Expedia’s revenue is generated from various sources, most notably from the booking of lodging, airline tickets, and other travel-related services. These services are typically offered through their various websites and mobile applications, which make up their online travel agencies (OTAs). The company also generates income from advertising and media revenue, and from other smaller sources such as insurance and package deals.

  • Industry Trends: The travel industry has seen significant shifts, with the increasing importance of online platforms and mobile booking apps, coupled with a surge in the experiences-based segment of travel. Although the global travel sector has seen some volatility due to macroeconomic forces and geopolitical uncertainty, it is currently still growing as it continues its recovery from the downturn caused by the COVID-19 pandemic. Companies that can offer seamless digital experiences are well-positioned to benefit from this market trend.

  • Margins: Expedia has operating margins that are considered relatively volatile. While they have managed to achieve a steady gross profit, selling and marketing expenses eat up a large portion of that. Expedia’s focus on building the best tech platform leads to large expenses. While the company is profitable, the operating margins are nowhere near the likes of certain other tech companies and need to be carefully monitored in the future.

  • Competitive Landscape: The OTA landscape is highly competitive, with key rivals like Booking Holdings and Airbnb. These companies are all vying for market share, offering similar, yet distinctly branded, services to travelers. Smaller, niche players may be found on a regional level, offering specific types of travel options. Other key competitors include travel aggregators, meta-search engines, and direct providers such as hotel chains and airlines.

  • What Makes Expedia Different?: Expedia’s business relies on a wide portfolio of travel options, including a significant network of airline, hotel, car rental, and cruise providers. The company has tried to leverage its experience over time to enhance its platform experience and offer an easy-to-use application to customers. This is in addition to their constant efforts to streamline and simplify internal operations to help increase profitability and free cash flows, and their willingness to embrace cutting-edge technology to better their service, and expand their customer base.

Financial Analysis:

  • Revenue and Profitability: Expedia has rebounded significantly in revenue following the COVID-19 pandemic, and its recent earning reports suggest an increase in overall profitability. However, the company is not entirely out of the woods yet, and there is a considerable reliance on a consistent performance and high volume of bookings for a good financial performance.
  • Leverage & Capital Structure: While Expedia isn’t as leveraged as a company like, for example, American Airlines, the company still has large sums of debt on its balance sheets, and it has historically shown a preference to leverage itself when an acquisition is desired. Although their management plans to reduce debt in the upcoming years, the current capital structure might be concerning for some. The company continues to have a low but sufficient cash balance of $5.6 billion in Q3 of 2023, with total liabilities reaching $15 billion in that same period.
  • Cash Flow: While positive, Expedia’s free cash flow is not as high as would be desired. They have a large level of CapEx due to constant investments into technology and improvements to their platform, which ultimately translates into less cash available for other means.

Recent Concerns and Management Commentary:

Expedia recently acquired a large amount of new users by having a large increase in marketing spend. This has worked in bringing more revenues, but this also reduced the profit margin. The company has struggled to reduce its costs despite the higher revenues, which is a big point of concern in the investment community. Their CEO, Peter Kern, stated on the earnings call that their revenue growth has a high ceiling due to them expanding to other areas of the world, but they need to bring down expenses and that will be the key to future profitability.

Moat Rating: 2 / 5 Expedia possesses a weak moat due to its established position within the travel sector. The company has a solid brand recognition and a good size advantage, which makes competition slightly difficult, however, they don’t have a monopoly by any means, and the low switching costs mean that customers can jump to other platforms with minimal effort. Furthermore, their business relies heavily on their relationships with third-party hotels and airlines that can potentially dictate prices, reducing pricing power.

Risks to the Moat and Business Resilience:

  • Intense Competition: The OTA industry is fiercely competitive, with rivals constantly innovating to steal market share. New entrants could emerge, or existing players could make significant improvements.
  • Shift in Consumer Preferences: As consumers preferences are constantly changing, and if Expedia fails to keep up with these changes, it may risk seeing the loss of customers and revenue to other platforms. If a platform offers more unique opportunities or a different pricing scheme, Expedia would struggle against it.
  • Technological Obsolescence: If better technology arises from their competitors, Expedia may see customers jump ship to other platforms offering a better experience. Thus, their reliance on a strong tech team can also be a double-edged sword.
  • Macroeconomic Sensitivity: The travel industry is highly sensitive to macroeconomic fluctuations, such as global economic crises, high inflation rates, and geopolitical uncertainty. This makes the company’s profitability susceptible to these issues.
  • Dependence on Third-Party Relationships: A major part of their business is to book reservations at hotels, with airlines, and with other third-party entities. If these entities were to offer significantly lower rates on their own platforms, a major part of Expedia’s value proposition would falter.

Business Understandability: 2 / 5 While the basic operations of Expedia (connecting buyers and sellers of travel services) are not overly complex, understanding the dynamics of the travel industry and forecasting the company’s future trajectory can be extremely challenging. This is because numerous variables are at play, including macroeconomic factors, the preferences of consumers, and competition from other players.

Balance Sheet Health: 3 / 5 Expedia has a manageable debt load, but still has large liabilities. Furthermore, it is not particularly cash-rich at the current time, and has been spending on growth strategies, reducing their cash positions. They are expected to reduce debt in the future, and increase their cash reserves, but these remain a key area to monitor. Their balance sheet is neither excellent nor poor, but it is adequate.