Can Expedia Stock Return To Pre-Inflation Shock Highs?

Expedia’s stock (NASDAQ
NDAQ
: EXPE), a travel company providing everything from airline tickets, to hotel rooms, and car rentals, currently trades at $119 per share, around 44% below its level of almost $214 seen on February 16, 2022 (pre-inflation shock high), and has the potential for sizable gains. EXPE saw its stock trading at around $84 at the end of December 2022, when the Fed kept increasing rates, and now remains 42% above that level. In comparison, the S&P 500 gained about 20% during this period. The company’s stock benefited as airlines and hotels have continued to see strong bookings even as the economy has shown signs of weakening. The first quarter of 2023, particularly, saw strong travel demand driven by increasing international travel, major city travel, and the reopening of Asia.

Returning to the pre-inflation shock level means that Expedia will have to gain about 80% from here. While it has the potential to recover to those levels, we estimate Expedia’s Valuation to be around $110 per share, almost 8% below the current market price. Expedia continues to invest in areas like technology, customer loyalty, and growing its business-to-business platform. In addition, it is also discussing its testing and deployment of artificial intelligence tools, including its recent integration of ChatGPT into its iOS platform. Our detailed analysis of Expedia’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how EXPE stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

EXPE and S&P 500 Performance During 2007-08 Crisis

EXPE stock declined from nearly $16 in October 2007 (pre-crisis peak) to around $4 in March 2009 (as the markets bottomed out), implying that EXPE stock lost almost 76% of its pre-crisis value. It recovered post the 2008 crisis to levels of about $12 in early 2010, rising roughly 223% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

EXPE Fundamentals Over Recent Years

EXPE revenues declined from around $12.1 billion in 2019 to about $5.2 billion in 2020, due to the impact of the Covid-19 lockdown. As the restrictions eased and the Covid vaccine was largely available, the company was able to grow its sales to $11.7 billion gradually. This was also a result of the pent-up demand due to the suppressed travel scene during the earlier phase of the pandemic. Earnings per share declined from around $3.84 in 2019 to $2.24 in 2022. The online travel agency is in a better position than its pre-Covid level, with a higher EBITDA margin of 20.1% in 2022 as compared to 17.7% in 2019 and free cash flow 70% higher than 2019 (at $2.8 billion) – largely due to reduced spending. There are no longer any restrictions on travel outside of a few areas. It also won’t be long before Chinese travel increases, and Expedia will also offer travel to other locations such as Japan for the full year (as it was not fully opened in FY’22).

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Expedia stock has the potential for strong gains once fears of a potential recession are allayed.

It is also helpful to see how its peers stack up. Check out how Expedia’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

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