As Expedia spends money on ad war, its stock pays the price
Expedia Inc. had said it was going to spend, but it still got punished for it.
shed nearly $3 billion of valuation Friday after revealing a profit decline as marketing costs rose faster than revenue. Expedia had warned that it would ramp up spending for an online advertising war with rivals including Priceline Group Inc.
and TripAdvisor Inc.
, which has weighed on all of their share prices in recent months, as well as other initiatives.
Analysts saw exactly what that looked like Thursday with management’s profit projections for growth of 6% to 11% in earnings before interest, taxes, depreciation and amortization. Executives had made sure to note three months earlier that Expedia historically delivers 10% to 20% Ebitda growth annually, “with very few exceptions.”
If this year is an exception, most analysts suggest sticking through it. Three downgraded the stock Friday, but all were to the equivalent of a hold position, and one analyst upgraded shares to buy after the plunge. None of 33 sell-side analysts covering the stock rate it a sell, and 70% call it a buy.
“Expedia still looks cheap versus other Internet names and we don’t think Ebitda [guidance of] 3% below consensus warrants a 19% movedown,” Jefferies analyst Brent Thill wrote.
Expedia’s stock actually closed down 15.5%, after rebounding along with the larger market Friday afternoon. Shares are down 29.7% in the past six months, while the S&P 500 index
has grown 4.3%.
Benchmark analyst Daniel Kurnos was one of the analysts to cut his rating on shares to hold from buy.
“After a long run of growth and leveling the playing field, it seems that Expedia is going to have a much tougher time capturing market share than previously anticipated,” he wrote, pointing to softness in the company’s core online-travel business as well as a disappointing take rate for HomeAway, Expedia’s vacation-rental platform.
Most analysts praised the potential results of Expedia’s spending. Thill wrote that Expedia is in the midst of a “painful but necessary transition” as investments in hotel supply, customer support and cloud technology should help Expedia better compete in online travel. He has a buy rating on shares and kept his $170 price target intact.
Morgan Stanley’s Brian Nowak upgraded shares to overweight just a month ago, and he also took a long-term view after the release. “In our view, these are the correct investments for the second largest global [online travel agency] in the two-player online travel marketplace,” he wrote. Expedia has a $15.2 billion market value, while Priceline is valued at $84.6 billion.
Nowak believes that Expedia’s spending will ultimately help it grow Ebitda, free cash flow and room nights at a faster pace, he said, yet he still lowered his target to $150 from $160.
Stifel analyst Scott Devitt took a more muted view. While he also thinks that the company’s various investments support long-term margin expansion, he’s cautious about the immediate future thanks to the investment as well as HomeAway.
“There are a number of moving parts impacting the business which somewhat limit visibility into near- to intermediate-term growth and margins,” he wrote. Devitt rates the stock hold but reduced his price target to $112 from $140.
While Kurnos likes the HomeAway business and thinks it helps the company diversify, he said, he is also worried that rival Airbnb “may be taking most of the prime real estate.” He’s also concerned about inventory competition between Priceline and Expedia.