Expedia (EXPE)

Online travel agency Expedia (NASDAQ:EXPE) missed Wall Street’s revenue expectations in Q1 CY2025 as sales rose 3.4% year on year to $2.99 billion. Its non-GAAP profit of $0.40 per share was 11.5% above analysts’ consensus estimates.

Company Overview

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

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.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Expedia grew its sales at a decent 12.8% compounded annual growth rate. Its growth was slightly above the average consumer internet company and shows its offerings resonate with customers.

This quarter, Expedia’s revenue grew by 3.4% year on year to $2.99 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Booking 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 room nights booked, a key performance metric for the company, increased by 9% annually to 107.7 million in the latest quarter. This growth rate is decent for a consumer internet business and indicates people enjoy using its offerings.

In Q1, Expedia added 6.5 million room nights booked, leading to 6.4% year-on-year growth. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t accelerating booking growth just yet.

Revenue Per Booking

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

Expedia’s ARPB fell over the last two years, averaging 1.8% annual declines. This isn’t great, but the increase in room nights booked is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if Expedia tries boosting ARPB by taking a more aggressive approach to monetization, it’s unclear whether bookings can continue growing at the current pace.

This quarter, Expedia’s ARPB clocked in at $27.74. It declined 2.8% year on year, worse than the change in its room nights booked.

A company’s gross profit margin has a significant impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors can determine the winner in a competitive market.

For online travel businesses like Expedia, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include customer support, payment processing, fulfillment fees (paid to the airlines, hotels, or car rental companies), and data center expenses to keep the app or website online.

Expedia’s gross margin is one of the highest in the consumer internet sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in product and marketing during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 89% gross margin over the last two years. That means Expedia only paid its providers $11.02 for every $100 in revenue.

In Q1, Expedia produced a 88.1% gross profit margin, in line with the same quarter last year. On a wider time horizon, Expedia’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

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 61.6% 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.

Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.

Expedia has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer internet business, boasting an average EBITDA margin of 21.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Expedia’s EBITDA margin rose by 3.8 percentage points over the last few years, as its sales growth gave it operating leverage.

This quarter, Expedia generated an EBITDA profit margin of 9.9%, up 1.1 percentage points year on year. The increase was encouraging, and because its EBITDA margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Expedia’s EPS grew at an astounding 60.8% compounded annual growth rate over the last three years, higher than its 12.8% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Expedia’s earnings can give us a better understanding of its performance. As we mentioned earlier, Expedia’s EBITDA margin expanded by 3.8 percentage points over the last three years. On top of that, its share count shrank by 17.7%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Expedia reported EPS at $0.40, up from $0.21 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Expedia’s full-year EPS of $12.43 to grow 13.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Expedia has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 14.9% over the last two years, quite impressive for a consumer internet business.

Taking a step back, we can see that Expedia’s margin dropped by 23.4 percentage points over the last few years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Expedia’s free cash flow clocked in at $2.76 billion in Q1, equivalent to a 92.2% margin. The company’s cash profitability regressed as it was 1.3 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Expedia reported $6.13 billion of cash and $6.47 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.98 billion of EBITDA over the last 12 months, we view Expedia’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $4 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Expedia blew past analysts’ EPS and EBITDA expectations this quarter. On the other hand, its number of room nights booked slightly missed, causing its revenue to also fall a bit short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5% to $160.75 immediately following the results.

Updated: May 22, 2025 at 10:20 PM EDT

Before making an investment decision, investors should account for Expedia’s business fundamentals and valuation in addition to what happened in the latest quarter.

Expedia isn’t a bad business, but we have other favorites. To kick things off, its revenue growth was good over the last three years. And while Expedia’s ARPU has declined over the last two years, its admirable gross margins are a wonderful starting point for the overall profitability of the business.

Expedia’s EV/EBITDA ratio based on the next 12 months is 6.5x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $188.45 on the company (compared to the current share price of $160.71).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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