Positive On Expedia Shares As Travel Spending Returns? 3 Trades For The Rebound

  • Stock Market Analysis
  • Editors Pick
  • Online travel agency Expedia shares have slid close to 20% in less than three weeks
  • Russia’s invasion of Ukraine puts renewed pressure on the travel industry
  • Long-term investors could consider buying EXPE shares at current levels

Shares of Expedia (NASDAQ: EXPE ), one of the world's largest online travel agencies by bookings, is down 2.5% year-to-date (YTD). Yet, in the past 12 months, EXPE shares have gained more than 5.9%.

Expedia Daily

By comparison, the Dow Jones Travel & Tourism Index is down 18.3% in 2022 and 22.8% in the past 52 weeks and shares of Booking (NASDAQ: BKNG ), its leading competitor, have declined 17.2% so far this year and 13.9% over the past 12 months.

Seattle, Washington-based Expedia operates a number of branded travel booking sites, including Expedia.com, Hotels.com, Travelocity, and Orbitz. Expedia and Booking are the leading online travel agencies (OTAs) in the US and Europe.

Recent US travel industry metrics suggest:

“In January 2022, travel spending declined to $79 billion (from $92 billion in December)… [But ] more than eight in 10 (82%) American travelers are excited to travel in the next 12 months—the highest level since the start of the pandemic.”

Meanwhile, between 2022 and 2026, revenues in the global travel industry are forecast to increase by a compound annual growth rate (CAGR) of almost 10.5%. Yet, such optimistic projections could potentially be revised if the current war in Ukraine were to continue.

For instance, the Germany-headquartered Lufthansa (OTC: DLAKY ) warns of higher costs and longer flights and cites: “flights to the South Korean capital Seoul will now take 90 minutes longer than ordinary. And travelers to Tokyo will have to prepare for up to two hours of additional flight time… This hike in fuel costs will add further pressure on the aviation industry…”

Expedia released Q4 financials on Feb.10. Revenue was $2.3 billion, up 148% year-over-year (YOY). But it was down 17% than revenue in Q4 2019, which is currently taken as the benchmark year. Adjusted net income was $167 million or $1.06 per share.

On the results, CEO Peter Kern commented:

“While we experienced yet another significant travel disruption from Covid this quarter, we were pleased to see that the impact was less severe… [We] continue to expect a solid overall recovery in 2022, barring a change in the trajectory of the virus.”

Prior to the release of the quarterly results, Expedia stock was around $195. Then, on Feb. 16, the shares hit a record high of $217.72.

However, on Mar. 4, they closed at $176.23, having lost around 20% in about three weeks. EXPE stock’s 52-week range has been $136.77 - $217.72, while the market capitalization stands at $27.5 billion.

What To Expect From Expedia Stock

Among 29 analysts polled by Investing.com, Expedia stock has a "neutral" rating.Expedia Consensus Estimates

Wall Street also has a 12-month median price target of $215.96 for the stock, implying an increase of more than 22% from current levels. The 12-month price range currently stands between $155 and $165.

Similarly, according to a number of valuation models on InvestingPro, like those that might consider P/E or P/S multiples or terminal values, the average fair value for Expedia stock stands at $242.54.

In other words, fundamental valuation suggests shares could increase about 37.5%.

We can also look at Expedia’s financial health as determined by ranking more than 100 factors against peers in the consumer discretionary sector.

For instance, in terms of cash flow and price momentum, it scores 2 out of 5. Its overall score of 2 points is a fair performance ranking.

At present, EXPE’s P/B and P/S ratios are 13.3x and 3.2x. Comparable metrics for peers stand at 5.0 and 4.0x. These numbers show that despite the recent decline in price, the fundamental valuation for EXPE stock is not necessarily cheap.

Our expectation is for Expedia stock to build a base between $165 and $175 in the coming weeks. Afterwards, shares could potentially start a new leg up.

Adding EXPE Stock To Portfolios

Expedia bulls who are not concerned about short-term volatility could consider investing now. Their target price would be $215.96, analysts’ forecast.

Alternatively, investors could consider buying an exchange-traded fund (ETF) that has EXPE stock as a holding. Examples include:

  • Invesco Dynamic Leisure and Entertainment ETF (NYSE: PEJ )
  • ETFMG Travel Tech ETF (NYSE: AWAY )
  • Global X E-commerce ETF (NASDAQ: EBIZ )
  • VictoryShares NASDAQ Next 50 ETF (NASDAQ: QQQN )
  • US Global Jets ETF (NYSE: JETS )

Finally, investors who expect Expedia stock to bounce back in the weeks ahead could consider setting up a bull call spread.

Most option strategies are not suitable for all retail investors. Therefore, the following discussion on EXPE stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor.

Bull Call Spread On Expedia Stock

Price At Time Of Writing: $176.23

In a bull call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e., Expedia) and the same expiration date.

The trader wants EXPE stock to increase in price. In a bull call spread, both the potential profit and the potential loss levels are limited. The trade is established for a net cost (or net debit), which represents the maximum loss.

Today’s bull call spread trade involves buying the June 17 expiry 190 strike call for $13.85 and selling the 200 strike call for $10.35.

Buying this call spread costs the investor around $3.50, or $350 per contract, which is also the maximum risk for this trade.

We should note that the trader can easily lose this amount if the position is held to expiry and both legs expire worthless, i.e., if the EXPE stock price at expiration is below the strike price of the long call (or $190 in our example).

To calculate the maximum potential gain, we can subtract the premium paid from the spread between the two strikes, and multiply the result by 100. In other words: ($10 – $3.50) x 100 = $650.

The trader will realize this maximum profit if the Expedia stock price is at or above the strike price of the short call (higher strike) at expiration (or $200 in our example).

Bottom Line

Since the start of the pandemic, travel shares like Expedia have been volatile. The recent military development in Eastern Europe has exerted further pressure on the stock.

Yet, this decline has also improved the margin of safety for buy-and-hold investors who could consider investing in Expedia soon. Alternatively, experienced traders could also set up an options trade to benefit from a potential run-up in the price of EXPE stock.

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