Gimme Credit analysts highlighted the significance of the upcoming summer season for Expedia (NASDAQ:EXPE), with the third quarter historically accounting for a substantial portion of its annual earnings.
"It is an important period for Expedia (EXPE) since Q3 has accounted for roughly 50% of its annual adjusted EBITDA the last two years," analysts note. While revenue growth for Q3 is expected to be around 7%, this falls short of previous quarters. Gimme Credit attributes this slowdown to a weaker-than-expected performance by Vrbo following recent technological upgrades.
However, the corporate bond research firm notes that Expedia's B2B segment, focused on partnerships with banks and airlines, has seen significant growth averaging 28% over the past four quarters. This growth, driven by new partners and strength in the Chinese market, is a positive indicator for the company.
Despite the slowing revenue growth, Gimme Credit remains positive on Expedia, pointing to rising adjusted EBITDA margins for four consecutive quarters. They attribute this to reduced technology spending and the completion of Expedia's platform migration.
While margins may hold steady due to investments in sales and marketing, Gimme Credit expects Expedia to generate healthy free cash flow of $2 billion this year, enabling continued share repurchases. This, combined with projected EBITDA growth, should lead to a decrease in leverage to 2.6x by year-end, the lowest level since 2018.
While acknowledging Expedia's near-term revenue growth might not reach past highs, Gimme Credit views the projected 7% annual growth favorably, especially considering the competitive landscape. They maintain their Buy recommendation, noting the 2031 notes trading at a spread of +94 to the ten-year Treasury.