The Reward Outweighs The Risk In Expedia, Analyst Says

By many metrics, 2017 was a disappointing year for Expedia Inc (NASDAQ: 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 (NASDAQ: 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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