The Reward Outweighs The Risk In Expedia, Analyst Says

By many metrics, 2017 was a disappointing year for Expedia Inc EXPE but the risk-to-reward setup has turned favorable, according to Bank of America Merrill Lynch. 

The Analyst

BofA's Justin Post upgraded Expedia from Neutral to Buy with an unchanged $145 price target.

The Thesis

The case for owning Expedia's stock in 2018 is quite simple: the EBITDA bar has been reset to a more "reasonable and beatable" level, Post said in a Wednesday note. (See the analyst's track record here.) 

The consensus estimate for 2018 calls for Expedia to report a full-year EBITDA of $1.93 billion. This implies that Expedia's core online travel agency business will grow 7 percent in 2018, a favorable comparison to a recent reported room night growth figure of 16 percent, Post said. 

Expedia's management continues to focus on driving growth by accelerating supply investments; ramping marketing on HomeAway, which boasts a "large" EBITDA growth opportunity; increasing cloud migration spend; and supporting the challenged Trivago performance, the analyst said. These are all important initiatives for the longer-term, but could in part help offset a period of slowing room night growth in early 2018, he said. 

One of Expedia's biggest rivals, Priceline Group Inc PCLN, looks like it is pulling back on its paid marketing channels, which implies Expedia could be at the very least a near-term beneficiary, Post said. 

"Despite potential for decelerating trends in 1H18, with Street estimates reset lower, we think risk-reward is positive as the Street could look for accelerating growth in 2019." 

Price Action

Shares of Expedia were up 3.27 percent a $125.39 at the time of publication Wednesday afternoon. 

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