UK Markets close in 16 mins
  • FTSE 100

    7,395.00
    +92.26 (+1.26%)
     
  • FTSE 250

    19,877.52
    +188.50 (+0.96%)
     
  • AIM

    958.06
    +10.89 (+1.15%)
     
  • GBP/EUR

    1.1802
    +0.0020 (+0.17%)
     
  • GBP/USD

    1.2457
    -0.0018 (-0.1408%)
     
  • BTC-GBP

    23,601.61
    -535.29 (-2.22%)
     
  • CMC Crypto 200

    654.79
    -18.59 (-2.76%)
     
  • S&P 500

    3,867.53
    -33.26 (-0.85%)
     
  • DOW

    30,975.89
    -277.24 (-0.89%)
     
  • CRUDE OIL

    112.60
    +0.39 (+0.35%)
     
  • GOLD FUTURES

    1,840.20
    -1.00 (-0.05%)
     
  • NIKKEI 225

    26,739.03
    +336.19 (+1.27%)
     
  • HANG SENG

    20,717.24
    +596.56 (+2.96%)
     
  • DAX

    13,968.28
    +85.98 (+0.62%)
     
  • CAC 40

    6,274.02
    +1.31 (+0.02%)
     

An Intrinsic Calculation For Expedia Group, Inc. (NASDAQ:EXPE) Suggests It's 23% Undervalued

  • Oops!
    Something went wrong.
    Please try again later.
·5-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

How far off is Expedia Group, Inc. (NASDAQ:EXPE) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Expedia Group

Step by step through the calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$2.41b

US$2.26b

US$2.53b

US$2.19b

US$2.18b

US$2.19b

US$2.21b

US$2.23b

US$2.26b

US$2.30b

Growth Rate Estimate Source

Analyst x4

Analyst x4

Analyst x2

Analyst x1

Est @ -0.49%

Est @ 0.25%

Est @ 0.76%

Est @ 1.12%

Est @ 1.37%

Est @ 1.55%

Present Value ($, Millions) Discounted @ 7.6%

US$2.2k

US$1.9k

US$2.0k

US$1.6k

US$1.5k

US$1.4k

US$1.3k

US$1.2k

US$1.2k

US$1.1k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$16b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$2.3b× (1 + 2.0%) ÷ (7.6%– 2.0%) = US$41b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$41b÷ ( 1 + 7.6%)10= US$20b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$36b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$181, the company appears a touch undervalued at a 23% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Expedia Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.6%, which is based on a levered beta of 1.289. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Expedia Group, we've compiled three relevant items you should explore:

  1. Risks: For instance, we've identified 2 warning signs for Expedia Group that you should be aware of.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for EXPE's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting