- Expedia has continued to manage its liquidity position well in the face of the ongoing COVID-19 pandemic.
- However, it is looking increasingly unlikely that summer 2021 will be the panacea that the travel industry was hoping for.
- For this reason, I anticipate that the stock could see downside from here.
Back in January, I made the argument that while Expedia (NASDAQ:EXPE) stands to see longer-term upside given a broad-based recovery in hotel demand - I also took the view that the stock has been appreciating too fast over vaccine optimism.
This trend ultimately continued over February, although we did see the stock start to consolidate heading into March:
With Expedia being more exposed to the direct facilitation of hotel bookings than companies such as TripAdvisor (TRIP) - which acts more as a travel information platform - this is a stock that could see more upside than its peers if hotel booking demand recovers faster than expected. On the other hand, the stock could also have downside if booking demand remains subdued for longer than expected.
When looking at the company's latest earnings release, we can see that growth in revenue, earnings and free cash flow was strongly negative compared to that of 2019. While the stock itself has been driven upwards by vaccine optimism, actual business performance has yet to follow suit:
While I had previously commended Expedia on increasing cash and cash equivalents by 31% to $4.353 billion in September 2020, this had moderated downwards to $3.363 billion by December 2020, which is near the same level we saw in December 2019:
However, while long-term debt is up from 2019 as a whole, the reported figure of $8.216 billion in December 2020 is only slightly up from the figure of $8.176 billion as reported in September 2020.
From this standpoint, Expedia continues to manage its liquidity position well - but eventually the company does need to return to profitability for this to continue.
Since October, we can see that while the S&P 500 is up by just over 14%, Expedia is up by over 72%.
Across travel stocks in particular, the vaccine optimism appears to be overdone.
Broad travel restrictions continue to remain in place this year, and on a global level the rate of vaccinations has not stopped COVID-19 from continuing to spread.
For instance, at the time of writing, 7.94 of every 100 people in the European Union have been vaccinated against COVID-19, along with 24.33 of every 100 people in the United States. This is significantly lower than countries such as Israel, where over 97 out of 100 people have been vaccinated.
At current vaccination rates, it is highly probable that big markets such as Europe and the United States will continue to impose restrictions on movement to at least some degree until vaccination incidences have become more widespread. The uncertainty surrounding such restrictions may lead would-be holidaymakers to ultimately defer bookings to 2022.
For instance, while many U.S. states have travel advisories in place rather than outright restrictions, travellers to New York from a non-contiguous state must adhere to certain guidelines regarding testing to avoid a 10-day quarantine, with quarantine regulations also needing to potentially be observed under other specific circumstances.
Given that the situation with COVID-19 is rapidly evolving - no one can say for certain whether restrictions may be eased heading into the summer months - and therefore I anticipate that the demand for domestic travel may be lower than expected.
Even if this is not the case, large cities in the United States are still particularly dependent on international tourism. As of October 2020, international arrivals to New York were down by as much as 93 percent - which makes it unsustainable for many hotel owners to operate - domestic tourism alone cannot sustain such businesses. This has a knock-on effect of lower bookings being taken through Expedia, and less spending on advertising - which is simply a waste of money for a business if guests are not showing up.
Expedia is continuing to manage its financial position quite respectably in the face of a highly challenging environment for the travel industry. However, I take the view that the recent run-up in the stock is overdone. It is looking increasingly unlikely that summer 2021 will be the panacea for the travel industry that many investors were hoping, and for this reason we could well see further downside in the stock as the reality of this becomes clear.
Expedia is one of the world leaders in the online travel business, and could be in a position to rebound strongly once restrictions start to ease and apprehension over COVID-19 starts to decline. However, I do not see this happening to the extent that investors had hoped come June 2021, and for this reason I anticipate that the stock will see further declines in the short-term.
Additional disclosure: This article is written on an "as is" basis and without warranty. The content represents my opinion only and in no way constitutes professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions.
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