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Bear of the Day: Expedia (EXPE)

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There have been plenty of winners to choose from in the tech sector recently, even over the past two months of increased volatility. However, we have started to see investors punish underperforming companies with slightly stretched valuations. Online travel booking giant Expedia (EXPE - Free Report) is one such stock.

Expedia is a U.S.-based travel company that operates about 200 travel websites in about 75 countries. Its portfolio includes recognizable names like Expedia.com, Hotels.com, Hotwire.com, trivago, Travelocity, and Orbitz.

After a disappointing Q4 earnings report, Expedia witnessed a plethora of negative earnings estimate revisions, and the stock has failed to generate any positive momentum. This Zacks Rank #5 (Strong Sell) might be due for a recovery eventually, but for now, investors should look to avoid it.

Latest Earnings Report

Expedia reported its fourth-quarter results on Feb. 8. The company posted adjusted earnings per share of 84 cents, missing the Zacks Consensus Estimate by 32 cents and sliding more than 28% year over year. This was Expedia’s six-consecutive earnings miss. Quarterly revenues of $2.32 billion also lagged our consensus estimate of $2.37 billion.

Adjusted EBITDA plunged 9% to $402 million. Notably, trivago, Egencia and Home Away EBITDA decreased 164.3%, 9.5% and 26.2%, respectively, on a year-over-year basis. Adjusted gross margin contracted 80 basis points from the year-ago period. Operating expenses as percentage of revenues were 65.1% compared with 62.5% in the prior-year period.

This increase in marketing expenses can be attributed to higher adjusted selling and marketing expenses. This is concerning for investors and indicates that Expedia is being forced to spend more to fend off increased competition.

In the report, Expedia said that it expects cost of revenues to grow slightly faster than revenues. Management also expects that technology and content expenses will grow significantly faster than revenues this year.

Earnings Estimates and Key Stats

Expedia’s concerning spending forecast caused analysts to revise their estimates downwards. This trend also took the air out of the stock, and shares are now down more than 12% since the earnings report.

But even with this latest slump, Expedia looks a little overvalued. The company is trading at 23.4x forward earnings, which should cause investors to question whether the post-earnings sell-off has brought the stock down to a fair price yet.

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