Amidst all of the valuation talk surrounding Facebook, which sounds eerily reminiscent of the chatter leading up to the dot-com crash, investors are forgetting about online firms with stronger, albeit more mundane, fundamentals. Based on my multiples analysis and DCF model, I find tremendous upside for Expedia (EXPE) and challenges for Zynga (ZNGA).
From a multiples perspective, only Expedia comes across as the true objective value play. It trades at only a respective 9.8x and 10.7x past and forward earnings with a dividend yield of 1.7%. To put this into perspective, consider that Expedia is valued at less than half of the 3 Digit MG Group average PE multiple! Zynga, on the other hand, is valued at 54.8x forward earnings off of an uncertain bet in social media.
At the fourth quarter earnings call, Expedia noted a strong finish to the year:
The fourth quarter wrapped up a solid year for Expedia. As promised, we completed the spinoff for TripAdvisor in the fourth quarter, unlocking significant value for our shareholders…
Additionally, we're investing in international expansion in order to position the business well for long-term growth. As such, although we saw transaction growth of 11%, gross bookings growth of 12% and revenue growth of 14% for the full year, these investments led to cost deleverage with adjusted EBITDA growing just 1%.
For the fourth quarter, gross bookings grew 10%, revenue growth -- grew 7% while adjusted EBITDA was down 4% year-on-year. Mark will have more to say about this after my remarks.
Fourth quarter gross bookings of $6.3B beat expectations with domestic growth of 7% and international growth of 15% y-o-y. On the other hand, competitive pressures and FX headwinds are hindering gains in hotels as the air travel business concurrently flounders. Top-line for the latter declined by 19% y-o-y, driven in large part by lower value per ticket. But, even still, net debt of $532M is rapidly turning into a net cash position, and the high beta will help drive strong risk-adjusted returns. The company spun off TripAvisor (TRIP) late last year and thus far TripAdvisor has appreciated by 24% while Expedia has gained 14.7% for the year to date.
Consensus estimates for Expedia's EPS forecast that it will grow by 0.4% to $2.76 in 2012 and then by 14.5% and 8.5% in the following tow years. Modeling a 3-year CAGR of 7.6% for EPS and then discounting backwards by a WACC of 9% yields a fair value figure of $43.89, implying 31.9% upside.
While Expedia has demonstrated a strong business model, Zynga's business model is highly uncertain. On the positive side, greater mobile usage will be a strong secular driver of value creation. Late 2011 launches Adventure World and CastleVille will further provide strong momentum going into 2012. On the other hand, I expect a significant decline in the interest surrounding Facebook, which, in my view, is nothing short of a craze (remember instant messaging?) Moreover, Zynga had only a sequential 5% top-line bookings growth in 3Q11, which was only a fraction of that achieved by Facebook over the same time period.
Consensus estimates for Zynga's EPS forecast that it will decline by 4.2% to $0.23 in 2012 and then grow by 43.5% and 27.3% in the following two years. This means that the company is currently valued at around 36.5x the consensus 2013 EPS target.