On the first trading day following Expedia's (EXPE -1.11%) after-hours earnings release last Thursday its stock surged. The Bellevue, Washington-based online travel agency saw stock prices rise by more than 11% as it beat consensus estimates on its top line.
While this latest report returns some sense of optimism to the company, it remains unclear whether that sentiment can return Expedia to an upward path. This stock has struggled over the last few years. Despite forecasts for double-digit earnings increases, both internal and competitive factors could prevent any sustained move higher for Expedia stock.
Expedia shot higher on earnings beat
The company brought in $2.75 billion in revenue for the fourth quarter. Though that represents year-over-year growth of 7%, the company missed consensus revenue estimates by $40 million. Expedia earned $1.24 per share on an adjusted basis, $0.06 per share ahead of estimates. The company also reported non-GAAP (adjusted) earnings per share of $1.24 during the same quarter last year.
The report stands in stark contrast to the third-quarter earnings report, which sent shares tumbling by almost 27.4% as the company missed estimates by a wide margin. The stock had already begun to recover before the report. That fact (and the post-earnings move higher following Q4 earnings) may signal improving customer faith. However, the stock still trades about 9% below the $135.36-per-share close before the release of Q3 earnings.
Despite this situation, this consumer discretionary stock looks appealing from a valuation standpoint. The forward P/E ratio stands at just 13.8. That comes in well below the S&P 500 average P/E ratio of 25.4. Moreover, with forecasted earnings growth at 19.5% this year and 21.1% in 2021, the multiple does not seem expensive. Chairman Barry Diller confirmed that the company expected double-digit earnings increases. Also, Wall Street predicts revenue of 8.2% in 2020 and 8.4% next year. This could bode well for finally resuming gains in Expedia stock, a company that has seen little net stock price gains since 2017.
The company faces turmoil at the top
Still, investors need to remain aware of factors that could hamper the growth of Expedia stock. For one, management remains in turmoil. About a month after the Q3 earnings announcement, CEO Mark Okerstrom and CFO Alan Pickerill announced their resignations.
Chairman of the Board Barry Diller attributed Okerstrom's resignation to a disagreement on strategy between the board and senior management. Diller also cited a poorly executed reorganization as a reason why the company missed third-quarter profit estimates. Yet Diller, who took over temporary management of Expedia's leadership team, promised to buy more Expedia shares as a "tangible sign" of his belief in the company's long-term future.
As of this writing, Expedia has not yet hired permanent replacements for these top jobs. Diller serves as acting CEO while Chief Strategy Officer Eric Hart remains acting CFO.
A dangerous competitive threat also looms
The other major obstacle is the company's competitive situation. As the owner of Hotels.com, Orbitz, and numerous other travel websites, Expedia has a diversified online travel portfolio. However, with the emergence of Alphabet's (GOOGL -1.81%) (GOOG -1.62%) Google Travel as a major player in online travel bookings, Expedia faces a competitor it cannot buy out.
This places Expedia in a dangerous position. Yes, Expedia owns multiple travel websites with well-known names. However, that does little to stop a well-resourced prospective competitor like Google from entering the business.
As things stand now, Expedia maintains a $17.5 billion market cap. While this is by no means small, it pales in comparison to the Google-parent's $1.04 trillion market cap. Expedia's market cap is less than half the size of Alphabet's revenue in the fourth quarter of 2019 (about $46.1 billion). Moreover, Alphabet's cash position alone, at $119.7 billion, is 6.7 times the size of Expedia's market cap. If Alphabet decides to compete more aggressively, it could leave Expedia with few effective responses.
Perhaps one saving grace for Expedia is that Alphabet already faces troubles with the Justice Department over antitrust concerns. Hence, a buyout by Alphabet is unlikely. However, Alphabet's resources could force Expedia to cut its margins significantly. This could seriously compromise the future growth of Expedia stock.
The expectations for double-digit profit growth amid a relatively low P/E ratio seem to indicate a bright future for Expedia. However, with turnover in the C-suite and a growing competitive threat from Alphabet, investors need to consider the uncertainties if they decide purchase Expedia stock.