Takeaway: EXPE delivering on the AWAY transition, but with the stock up here we’re not hanging around for when leisure catches up to biz trends

KEY POINTS

  1. REMOVING FROM BEST IDEAS LIST:  We’re removing EXPE from the Hedgeye Best Ideas Long List.  The company reported a good quarter but with some pushes and pulls.  With the stock up ~20% in the last 4 months, there is less room for error - risk/reward looks even.  The risk we’re specifically worried about is the trajectory of room-night growth looking out to 2017.  Management did guide to accelerating room nights in Q4 but we’re concerned with the hotel industry overall and the macro environment.  Leisure travel has held in remarkably well vs. business transient, but the risk might be to the downside.   As we expected, mgmt is really delivering on AWAY (and the other integrations) but with the stock up here, there is just too much risk in the core business from pending macro headwinds to justify as a Best Idea, in our opinion.
  2. OVERDELIVERING ON AWAY: AWAY beat consensus revenue estimates by over 10%, producing another quarter of accelerating y/y growth (61% in 3Q vs. 37% and 17% in 2Q and 1Q, respectively).  Further, the $77M in AWAY 3Q EBITDA was nearly double the amount it produced as a standalone company last year (39.9M).  Mgmt made a point to temper expectations into 2017 by talking up the risk behind subscription ASP cannibalization, which is the prudent move on their end, but likely an overblown risk (see note below for detail). In short, most of AWAY’s listings subs are lumped into the lower tiers that have comparable annual dues to AWAY’s new plan w/o the online bookability feature.  That said, the average headwind from opting into online bookability is a roughly $150/sub, which translates to $2,500 in bookings, slightly over what EXPE has estimated for AWAY’s average booking transaction as measured by its expected 6% booking fee (see table below).  So the trade-off is basically one transaction for the chance to steer many more online.   AWAY naturally can’t sustain a +60% growth rate, but it still has room to run next year. 
  3. ELEPHANT IN THE ROOM: EXPE failed to produce a reacceleration in room nights despite ramping up marketing spend on Trivago as we expected.  Given that EXPE’s contribution to Trivago revenue decelerated once again on a y/y basis, we suspect EXPE slowly ramped its Trivago marketing spend through the quarter rather than pressing throughout.  Management did indicate that room night growth accelerated through the quarter. Moreover, mgmt softly guided to a reacceleration in room nights growth in 4Q, but it basically said the same thing last quarter.  We’re not necessarily questioning its 4Q outlook given EXPE’s accelerating Trivago spend, but looking out to 2017 wondering when leisure travel trends are going to catch up with the deteriorating business transient trends (which generally are a lead indicator) that our GLL team has been flagging.  Additionally, the fact that meta is turning into an increasingly important battleground is a going concern.


EXPE | Closing Best Idea Long - EXPE   AWAY scen sub ASP decay

EXPE | Closing Best Idea Long - EXPE   AWAY User Fee Breakdown 3

EXPE | Closing Best Idea Long - EXPE   Triv growth 3Q16

EXPE | Closing Best Idea Long - EXPE   Triv   3Q16

EXPE | Pay to Play (HomeAway)
06/17/16 09:28 AM EDT
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Let us know if you have any questions or would like to discuss in more detail.

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet   

Todd Jordan
Managing Director


@HedgeyeSnakeye

Sean Jenkins
Analyst