Expedia Inc Earnings: The Bulls Are Getting Nervous

Though Wells Fargo's Peter Stabler anticipated marketing environment challenges, EXPE's 4Q profits miss still left him reeling.

What the hell happened to Expedia Inc (NASDAQ:EXPE) shares? Investors have thrown shares crashing almost 20% today- and even a bull is out slashing his price target 16% lower.

The company’s first quarter under new CEO Mark Okerstrom’s helm (who is filling Dara Khosrowshahi’s shoes after the previous CEO hopped ship to head Uber) came up short of Street-wide profit expectations. Marketing costs ended up being pricey this quarter- a period Okerstrom acknowledges certainly did not go according to financial plans.

Wells Fargo analyst Peter Stabler notes that he saw the writing on the wall in his online travel industry research report, pinpointing various headwinds circling the online travel sector- especially an increasingly tough marketing backdrop.

However, the analyst likewise had thought the company stood “among the more insulated,” taking the bet that Expedia offered “greater product diversification.” Now? Stabler is singing a less bullish tune. Following the “quarter’s surprisingly poor 4Q result and weak guide, we are less sure of this position.”

In reaction, the analyst reiterates an Overweight rating on EXPE stock but cuts the price target from $155 to $130, which implies a 31% upside from current levels. (To watch Stabler’s track record, click here)

To put it bluntly, revenue “underwhelmed” for the quarter, with Expedia posting an 11% year-over-year rise to $2.32 billion, but still coming up short of the analyst’s expectations. Stabler attributes this weakness to HomeAway and Core OTA revenues, even though rom night growth of 15% year-over-year general met expectations. Adjusted EBITDA of $402 million, which slices 17.4% of the revenue pie failed to meet the analyst’s expectations on a 9% miss.

“Encouragingly, however, CEO Mark Okerstrom indicated that Expedia’s core global brands continue to see healthy room night growth (17%) and stable EBITDA margins, while the relative underperformance was more attributable to continued investments in HomeAway, ‘flattish’ growth among regional brands (Travelocity, Orbitz, Wotif), and the recent headwinds facing Trivago,” highlights Stabler.

Another disappointment of the print: the EXPE management team cut 2018 EBITDA in light of cloud and supply chain investments. Even though the company had before hinted at a conservative earnings guide, the growth guide of 6% to 11% year-over-year far underperforms the bottom-end of the traditional 10% to 20% outlook. This is a miss that left Stabler “surprised.” The company is leveling up in cloud investment with roughly $170 million and angling to boost hotel supply in international markets as a top priority- all while improving customer support initiatives.

On the heels of the print, the analyst is scaling back his adjusted EBITDA expectations to 11% year-over-year, which aligns with the tail-end of EXPE’s guide. Looking into the back half of the year, Stabler projects over 100% of this growth will hit then- although the analyst’s first quarter adjusted EBITDA forecast of $193 million suggests an 8% year-over-year dip.

Bigger picture, “While we believe there may be greater competitive headwinds for Expedia than we anticipated, particularly on the vacation rentals side, we balance this view with the fact that Expedia remains the leading diversified travel platform in a $1.6 trillion travel market. Therefore, while we are disappointed with the result, we think much of the broader longer term opportunity remains intact,” Stabler explains, noting his bullish thesis may be “shaking, but not (yet) breaking.”

At the end of the day, Stabler continues to bank on EBITDA gains reaccelerating once the company’s investments “anniversary.”

TipRanks suggests a bullish majority on Wall Street when it comes to the online travel giant’s market opportunity. Out of 17 analysts polled in the last 3 months, 12 rate a Buy on Expedia stock while 5 maintain a Hold. Worthy of note, the 12-month average price target stands at $137.21, marking a healthy nearly 39% upside from current levels.

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