EXPE:NASDAQ

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

EXPE: NASDAQ

Expedia Group, Inc. is an online travel company, which engages in the provision of travel products and services to leisure and corporate travelers.[1] It has brands including Expedia.com, Hotels.com, Trivago, and Vrbo. [2] It is the second largest online travel agency (OTA) in terms of annual revenue, and as of 2019 had over 1.8m vacation rental listings, 312 annual room nights, and over 500 airlines. [3]

Investment Thesis

In our view, Expedia should recover with airline travel and more hotel usage post COVID, while playing in a growth industry benefiting from the shift toward online booking. The company has a large opportunity to expand margins and free cash flow, which they have outlined.[4] Cloud migration should result in a better product, and the cost of this has, in our view, bogged results down. The company has an asset in Vrbo that is undervalued based on our work, as it is part of Expedia. Finally, the largest shareholder has a new found urgency[5], and the valuation in our view is attractive.

Confirmation through Research

With a vaccine, we believe travel demand will pick up, especially with pent up demand as people have lost a year of travel. Online travel agencies, like Expedia, are secular growers in our view as people continue to shift toward booking online versus at an agency.[6] We believe there is a large opportunity to expand margins and free cash flow through more efficient marketing spending, reduction in SG&A where there is duplication of roles across different brands (separate engineer teams for every brand) and cost optimization.[7] The company has publically announced nearly $1bn in cost cutting/optimization.[8] We believe, based on expert calls and deep due diligence, that there is even more room for optimization. Further, cloud migration helps companies in a variety of ways. We believe this migration will make the algorithms more adaptable, allow for greater cost sharing across brands, and create better matching of supply and demand. Barry Dillar is the largest owner and has publically stated his dissatisfaction with the company, his goal for cost cuts, and his want for the company overall to be ran better. [9] Vrbo, which is the second largest vacation rental company behind Airbnb, in our opinion, could be worth $8 billion to $16 billion alone in 3 years.[10] Based on cost cutting and optimization, we believe the company can earn over $10[11] a share, which would make it quite undervalued. Further if they do spin out or monetize Vrbo, it could add up 40% to 80% to our valuation based on our valuation range for it mentioned previously.

Variant Perception

We do not believe the market is assigning fair value to the business considering the secular nature of OTA’s, the cost cutting opportunity, cloud migration, urgency of the largest shareholder, and hidden value of Vrbo. We believe that if the management can execute the cost cuts previously mentioned, and potentially monetize Vrbo, it could be worth at double of what this business sells for today.