Is It Time to Fully Trust Expedia?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Over the last year, Expedia (NASDAQ: EXPE  ) has been a very fickle company, at times showing the greatness of (NASDAQ: PCLN  ) and then often looking more like Orbitz (NYSE: OWW  ) . Despite this fact, shares are currently trading at new all-time highs, which makes me wonder whether investors should finally feel confident to hold Expedia long term?

An inconsistent past
Orbitz had the potential to be a great online travel company: It had a strong platform, a loyal user base, and initial growth.

Instead, the company has been trapped in a rut, unable to really breakout and produce the same level of growth that we've come to expect with the likes of Essentially, the company made bad investments – has a return on assets of only 3.5% -- that have hurt its profitability.

Specifically, Orbitz has operating margins of only 7.8%; and now, with nearly $500 million in debt and an accumulated deficit of more than $1 billion, the company is unable to take large calculated risks or produce the consistent growth that so many investors expect.

In many ways, Expedia has become very much like Orbitz.

Expedia has more debt at $1.25 billion, and has made just as many bad investments, which is why its return on assets is just 4.3%. As a result, Expedia's fundamental performance has been inconsistent over the last year.

What has done differently?
If you look at the valuations of and Expedia –'s market cap is nearly 6.5 times larger – you might not realize that is only 35% larger based on annual revenue.

Clearly, has been awarded a valuation premium, which is well-deserved.

Over the years, has made tremendous investments in emerging markets and with acquisitions like and Kayak. This is evident based on its return on assets of 17.36%, which then translates into an operating margin of more than 35%.

To put this in perspective,'s operating margin is more than triple that of Expedia. And given the fact that both operate in the same industry with a near equal presence in emerging markets, this level of efficiency on behalf of is staggering.

Still, with Expedia being so large the opportunity for improvements is present. Expedia just needs to make solid investments, continue to grow, and improve its margins consistently.

What does this mean for Expedia?
From an investment perspective the upside is absolutely enormous, which can be seen in the disconnect between valuation and the fundamentals of it and The problem is that if Expedia is ever going to trade at a multiple that mirrors it has to become fundamentally consistent, which is where the risk comes into play.

However, Expedia's most recent quarter might signal that the company has turned a corner. Specifically, Expedia grew revenue by 18% year-over-year including a 21% boost in bookings, both of which were better than the prior quarter. This came in a quarter when Expedia's visibility in Google search reportedly fell significantly, up to 25% according to some reports, a problem that has since been resolved.

As a result, Expedia showed great strength in emerging markets to help drive its 18% growth. In particular, Trivago, which was acquired by Expedia early last year, grew an incredible 85% year-over-year. Furthermore, Expedia claims that Trivago's growth was responsible for four percentage points of its 18% total growth, meaning that without Trivago Expedia's total revenue would've grown at a less impressive 14% clip.

Now, while some might view Trivago's impact on Expedia's topline as negative, investors must remember that this represents a successful investment on behalf of Expedia, which is something has been doing for the better part of the last decade.

As a result, Expedia achieved net income growth, as profits rose 41% year-over-year, showing a significant boost in margins.

Final thoughts
Right now, even at new highs Expedia is cheap and has the potential to trade considerably higher if the company can continue to grow and operate efficiently.

Granted, Expedia is not growing at the same level as, but with Trivago it does seem that Expedia has a real gem on its hands. As a result, as Trivago continues to grow and become a larger piece of the Expedia pie, the company's total return on assets should rise, which in turn will drive margins, increase profitability, and produce revenue growth.

Overall, the impact of Trivago points to a very bullish year for Expedia: The company simply needs to stay in the double digit growth rate range, let Trivago do the rest, and then its stock will continue to trend higher.

Hence, you might not be able to fully trust Expedia yet, but you can give it the benefit of the doubt, at least for now.

More compelling ideas from The Motley Fool
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2836758, ~/Articles/ArticleHandler.aspx, 8/29/2015 4:58:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 19 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
EXPE $116.51 Down -0.94 -0.80%
Expedia, Inc. CAPS Rating: ***
OWW $11.50 Down -0.07 -0.61%
Orbitz Worldwide,… CAPS Rating: *
PCLN $1259.39 Up +7.38 +0.59%
Priceline Group CAPS Rating: ****