Expedia's (NASDAQ:EXPE) Q4 Earnings Results: Revenue In Line With Expectations But Stock Drops

Full Report / February 08, 2024

Online travel agency Expedia (NASDAQ:EXPE) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 10.3% year on year to $2.89 billion. It made a non-GAAP profit of $1.72 per share, improving from its profit of $1.26 per share in the same quarter last year.

Expedia (EXPE) Q4 FY2023 Highlights:

  • Revenue: $2.89 billion vs analyst estimates of $2.88 billion (small beat)
  • EPS (non-GAAP): $1.72 vs analyst estimates of $1.70 (1.4% beat)
  • Free Cash Flow was -$415 million compared to -$1.59 billion in the previous quarter
  • Gross Margin (GAAP): 88.2%, up from 84.3% in the same quarter last year
  • Booked Room Nights: 77.4 million, up 6.6 million year on year
  • Market Capitalization: $21.44 billion

Originally founded as a part of Microsoft, Expedia (NASDAQ:EXPE) is one of the world’s leading online travel agencies.

Expedia owns a wide portfolio of online travel brands, and owns stakes in many others. Its core Expedia site is a full service online travel agency (OTA) featuring airfare, lodging, car rentals, cruises, and insurance. Hotels.com is focused exclusively on hotels globally, Vrbo (previously HomeAway) is Expedia’s alternative accommodations property. Other properties include Orbitz, CheapTickets, Travelocity and business travel unit Egencia. Expedia also owns a majority stake in trivago, a hotel metasearch company, that generates revenues through advertising.

For consumers, Expedia simplifies planning travel, by aggregating supply of hotels, flights, and experiences and using its scale and rewards programs to offer the best prices, while for suppliers, Expedia delivers one of the largest audiences of travel shoppers online.

Historically, Expedia has held its largest market share in North America, specifically in Hotels, while it has long sought to take market share from market leader Booking.com and Priceline in Europe. It acquired HomeAway in recent years and has begun building up an alternative accommodations business to compete with AirBnB.

Online Travel

Because of the enormous number of flights, hotels, and accommodations available, travel is a natural fit for marketplaces that aggregate suppliers, simplifying the shopping process for consumers. Online travel platforms today make up over 50% of the industry’s bookings, a percentage that has been rising for 20 years, and will likely continue in the years ahead.

Expedia (NASDAQ:EXPE) competes with a range of online travel companies such as Booking Holdings (NASDAQ:BKNG), Airbnb (NASDAQ:ABNB), TripAdvisor (NASDAQ:TRIP), Trivago (NASDAQ:TRIV) and Alphabet (NASDAQ:GOOG.L).

Sales Growth

Expedia's revenue growth over the last three years has been exceptional, averaging 57.1% annually. This quarter, Expedia reported mediocre 10.3% year-on-year revenue growth, in line with what analysts were expecting.

Expedia Total Revenue

Usage Growth

As an online travel company, Expedia generates revenue growth by increasing both the number of stays (or experiences) booked and the commission charged on those bookings.

Over the last two years, Expedia's nights booked, a key performance metric for the company, grew 19.6% annually to 77.4 million. This is strong growth for a consumer internet company.

Expedia Booked Room Nights

In Q4, Expedia added 6.6 million nights booked, translating into 9.3% year-on-year growth.

Revenue Per Booking

Average revenue per booking (ARPB) is a critical metric to track for consumer internet businesses like Expedia because it not only measures how much users book on its platform but also the commission that Expedia can charge. Expedia ARPB

Expedia's ARPB growth has been decent over the last two years, averaging 5%. The company's ability to increase prices while constantly growing its nights booked demonstrates the value of its platform. This quarter, ARPB grew 0.9% year on year to $37.30 per booking.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Expedia's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 88.2% this quarter, up 4 percentage points year on year.

For online travel businesses like Expedia, these aforementioned costs typically include customer support, payment processing, fulfillment fees paid to the airlines, hotels, or car rental companies, and data center costs to keep the app or website online. After paying for these expenses, Expedia had $0.88 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Expedia Gross Margin (GAAP)

Gross margins have been trending up over the last 12 months, averaging 87.5%. Expedia's margins are some of the highest in the consumer internet sector, enabling it to fund large investments in product and marketing during periods of rapid growth to stay one step ahead of the competition.

User Acquisition Efficiency

Consumer internet businesses like Expedia grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It's very expensive for Expedia to acquire new users as the company has spent 60.2% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between Expedia and its peers.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Expedia reported EBITDA of $532 million this quarter, resulting in a 18.4% margin. Furthermore, Expedia has shown strong profitability over the last four quarters, with average EBITDA margins of 19.6%.

Expedia Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Expedia burned through $415 million in Q4,

Expedia Free Cash Flow

Expedia has generated $1.84 billion in free cash flow over the last 12 months, an eye-popping 20.6% of revenue. This robust FCF margin stems from its asset-lite business model and scale advantages, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Expedia's Q4 Results

It was good to see Expedia beat analysts' adjusted EBITDA expectations this quarter. On the other hand, its revenue growth stalled as its gross bookings came in lower than expected. Overall, this was a mediocre quarter for Expedia, and the market was likely looking for more bookings. The company is down 7.8% on the results and currently trades at $147.27 per share.

Is Now The Time?

When considering an investment in Expedia, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Expedia is a great business. For starters, its revenue growth has been exceptional over the last three years, and analysts believe that's sustainable for now. And while its sales and marketing spend is very high compared to other consumer internet businesses, the good news is its impressive gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

At the moment Expedia trades at 7.6x next 12 months EV-to-EBITDA. Looking at the consumer internet landscape today, Expedia's qualities really stand out, and we really like it at this price.

Wall Street analysts covering the company had a one-year price target of $159.48 per share right before these results (compared to the current share price of $147.27), implying they saw upside in buying Expedia in the short term.

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