Unquestionably, Expedia Stock is a great business and for that reason one of the top positions in my portfolio. Lately however, I have been seeing that the company is spending too much too fast on marketing and acquisitions, betting heavily on a future that looks bright on paper, but has yet to be proven.
While Expedia may be right, in some instances organic growth is more important that growth through acquisitions and over spending on marketing When this kind of rapid growth happens, companies can accumulate dangerous amounts of debt too quickly; the smallest tailwind can cause serious trouble and instability.
To illustrate my concerns, I’ve included a list of the most recent Expedia acquisitions/strategic investments:
In November 2014, Expedia completed its acquisition of Australian-based Wotif Group for $658 million. Wotif Group is a prominent player in the Asia Pacific market with a host of travel brands under its umbrella, including Wotif.com, lastminute.com.au, travel.com.au, Asia Web Direct, LateStays.com, GoDo.com.au, and Arnold Travel Technology. Wotif’s portfolio focuses on hotel and air, offering consumers more than 29,000 bookable properties across the globe. The group currently operates from Australia, China, Indonesia, Malaysia, New Zealand, Singapore, Thailand, UK, and Vietnam.
Expedia acquired French car rental company, Auto Escape, in June 2014 for $85 million. The acquisition increased Expedia’s exposure to the $36.9 billion global car rental industry, which is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019, according to Transparency Market Research.
Auto Escape offers car rental services from over 300 car rental suppliers in 125 countries, and has a fleet of over 800,000 vehicles. It is estimated that Auto Escape’s revenues increased fivefold in the last five years to €120 million ($160 million). Auto Escape became a part of the CarRentals.com brand, a business unit managed by Expedia’s Hotwire Group.
In January 2015, Expedia acquired online travel agency Travelocity from technology company Sabre Corp for $280 million in cash. The deal follows a 2013 marketing agreement in which Expedia Inc’s technology powered platforms for Travelocity’s U.S. and Canadian websites, while Travelocity drove additional web traffic to Expedia.
Expedia is currently trying to seal a $1.34 billion takeover of Orbitz. Expedia’s blockbuster purchase of Orbitz may not significantly alter the competitive landscape for consumers, but it still represents a dramatic move in the larger, ongoing battle for travelers’ clicks, dollars and long-term loyalty. The newly enlarged Expedia will essentially control 75 percent of the U.S. online travel agency (OTA) market, based on 2013 figures. However, OTAs handle just 16 percent of total bookings, meaning that the company’s total is closer to 12 percent, hardly a monopolistic scenario – at least in the current market.
In 2013, Expedia agreed to take a majority stake in leading German travel metasearch site Trivago in a cash and stock deal worth $632 million.
Founded in 2005, Dusseldorf, Germany based Trivago has a strong presence in hotel metasearch in Germany, Spain, the UK, Italy, France, and has recently entered the U.S. market.
Expedia has signed a definitive agreement to take a 62% stake in Trivago, which expects to take in $132 million in net revenue in 2012.
This year, Expedia made a $270 million investment in Decolar/Despegar, getting close to a 20% stake of the largest online travel agency (OTA) in Latin America. Expedia is known for making these strategic investments before fully acquiring companies, and if history repeats itself, this may be the first step in a future acquisition, two or three years down the road. That was the model they used with Travelocity – they began investing back in 2013, and finally acquired the company two years later.
When taken together, these acquisitions add up $3.2 billion since 2013. For a company that is generating a yearly net income of ~$300 million putting their debt to equity ratio at 1.05, double that of Priceline at 0.45. This means Expedia is highly leveraging its acquisitions through debt. To a certain point this strategy makes sense, but things may not materialize as quickly as they would like or need. For instance, the company is losing tons of money on its venture with elong, one of the biggest OTAs in China, where Expedia is betting bi. Last quarter the company lost $33 million on this deal, and they expect to continue losing money at the expense of positioning and expansion in the Chinese market. This investment is an example of a big bet that may or may not produce the expected results. There is fierce competition in China including Alibaba and Ctrip, and the market is not as mature or proven as those of the United States and Europe.
For Q1 2015, Expedia reported an operating loss of $51 million including China, compared to a $3 million operating loss last year. This led to an adjusted loss per share of $0.03, while analysts were expecting a profit of $0.09 per share. Excluding China, the company delivered an operating loss of $10.9 million. In the short terms this may not be a problem, but spending and acquiring companies like is 1999 won’t be sustainable in the long run. Since 2010, shareholder equity has decreased -36%, while Priceline’s shareholder equity is up 518%.
In order to maintain growth and market share Expedia is spending heavily on advertising. Total sales & marketing are up nearly 70% of core OTA revenue (22% Y/Y). Meanwhile, SG&A expenses rose 17% Y/Y. Overall, spending is outpacing revenue growth, which is expected to continue as competitive headwinds remain.
If this trend of massive acquisitions continues at the expense of shareholders value and debt, I may sell my position in the coming months. I already have the company under close observation, and will be monitoring all future developments. While I think acquisitions can be quite valuable when they make good strategic and business sense, they also have the potential to be very dangerous if they are leveraged and made on assumptions that may never be fully realized.