Online travel stocks could see pre-pandemic growth rates by 2024: Analyst

Travel and travel booking stocks hope this year's summer travel demand can return them to their pre-pandemic growth outlooks. Scott Devitt, Wedbush Securities Managing Director of Equity Research, joins Yahoo Finance Live to break down the state of the travel industry while examining the forecast for ride-share stocks.

Video transcript

- The chief executives of Marriott and Expedia, among a long list of travel CEOs, recently telling Yahoo Finance that demand remains strong and the industry is set up for a strong summer season. Wedbush is out with a new note on the sector with a list of names that they think are best positioned. Joining us now is the analyst behind that note, Scott Devitt, managing director of equity research at Wedbush Securities.

Scott, it's good to see you. You just initiated coverage on a number of online travel and mobility stocks. Let's start with the online travel names. Who do you think is best positioned in this environment and why?

SCOTT DEVITT: Now we like booking the best. The travel industry has gone through a deep decline during the pandemic. A recovery today, if you listen to the executives, talk about how the recovery continues to be strong. There's going to be a point in time where that no longer is the case. And you want to own best-in-class assets.

And what I mean is travel industry is a GDP-type growth industry. Online travel, which I cover, is faster growing, but it's a very high penetration rate. And so, the overall growth rates under normal circumstances are relatively pedestrian for a growth industry. So you want to own these high-quality businesses that are cash generative that are buying back stock along the way. And that is booking.

Our second favorite idea, but a neutral rating at the moment because we're just waiting out this period, would be Airbnb. It's a very well-positioned company for the long term. But the challenge that Airbnb faces is that consumers, during and coming out of the pandemic, we're looking at longer stays and more non-urban locations. And now they're looking at shorter stays and urban locations, which more favors traditional hotels.

- So I mean-- let's go back to sort of those two names because I was going to ask you with something like booking. I mean, how much of it is about having a platform that has a number of verticals probably not the right word but a little more diversified in their offerings. Airbnb, we're talking about specific stays, and it is about stays. Where you look at something like booking.com, maybe it's about being able to plan out your entire vacation there.

SCOTT DEVITT: That's true. And you have a very diverse traveler with booking. And that 85% of the stays on booking are outside the US. So it's more traditional hotels. About 70% of the bookings on booking are traditional lodging versus alternative. And then you have that international dynamic which, as you've heard from executives in the industry, international is earlier in its recovery, which we think positions booking quite well as well.

- Scott, are you seeing signs of normalization? And I guess where are you seeing a bit of a slowdown or a bit of just getting back to where we were pre-pandemic?

SCOTT DEVITT: Well, you can see it in a few places. The most recent data that we've looked at shows that revenue per available room night for alternative inventory has declined year over year in the month of April. And traditional hotels still had modest growth in April, but alternative began to decline.

In addition to that, you have this dynamic of year-over-year growth rates because there was such a Roar and rally coming out of the pandemic from a low base that-- from a percentage standpoint growth rates were very high for the first year to really a year and a half coming out.

We're getting to the point now where you're comping much stronger numbers. So the second quarter of '23 is going to be the first quarter where you have relatively low rates of growth versus what we've been seeing. That's going to continue through the remainder of 2023. And by 2024, the growth rates of these companies are going to look more like they did before the pandemic. That's going to be an interesting test for the stocks, and that's why we're relatively neutral on the group.

- Scott, one more name you're watching in the travel space is Expedia. You've got a neutral rating on that. $116 price target there. I mean, how is that different from somebody like Booking Holdings if you're talking about having diversified assets that are being offered on their platform?

SCOTT DEVITT: So Expedia is more US-centric. So the company's benefited already from the recovery in the US. And so they're not as leveraged international as booking. There's been a long history of booking outperforming Expedia. And in fact, in terms of total gross bookings since 2019, booking is up 55%, whereas Expedia is flat. So that kind of highlights the strategic differences and the competitive differences that have favored booking versus Expedia.

Having said that, if travel holds up longer and the strength continues through the summer into the fall and into the winter, Expedia is a statistically inexpensive stock. It trades at about 5 and 1/2 times EBITDA on 24 numbers. So even though it's not a name from like a growth in longevity standpoint that we tend to favor, we could see the stock move higher if the travel conditions hold up for longer than investors expect.

- Scott moving over to your mobility coverage. Uber is your topic in that space. You have an outperform rating on that stock. It certainly has been a leader now for quite some time. What are-- what do you see as the catalyst here for Uber for that continued long-term success?

SCOTT DEVITT: So Uber is in the 10 largest GDP markets in its ridesharing business. It is number 1 and 8. In the delivery business and the 10 largest GDP markets, its largest in six. So it dominates the US market relative to its peer Lyft. It performs very strongly outside the US and ride share.

There were questions about the viability of this business model before the pandemic. Investors questioned if it could ever be profitable. And now you have a business that's trending towards 2024 with the ability to generate between $4 and $5 billion in free cash flow.

In addition to that, there's the delivery business that I would argue that DoorDash probably does a better job in the US than Uber Eats does. But when you look at that business holistically in terms of the international markets that Uber does well in.

And the fact that Uber has a wrapped loyalty program, meaning that you subscribe to Uber One, you get benefits for ride-sharing and delivery, which is unique relative to its peers. And now, 27% of total bookings are in the Uber One program. That's a unique competitive advantage that others are not going to be able to match. And it positions the company. Well, for the long term.

So the stock's done very well as of most of these stocks over the past three, six, and 12 months. But we are looking for blue chip cash flow generative competitively advantaged companies in an environment that we think may flip from tailwind to neutral to headwind in the next year. And Uber passes that test on the mobility side.

- So, let's take one of those factors that you just highlighted. Competitively advantage when you look at a name like DoorDash. They certainly expanded beyond sort of their standard food delivery, restaurant delivery, they have grocery delivery. They've expanded into helping small businesses too. Where do you think they stand in that broader landscape right now? How much of an advantage do they have?

SCOTT DEVITT: They have a very strong management team and a very good product. What they don't have yet is proof that the standalone entity delivery business is a good or high-margin business. They're still in the process of proving that out. Whereas, as I mentioned, with Uber, you've got that tied to a ridesharing business that's already proven cash flow capability in global scale.

So DoorDash, to me, has potential to be a blue chip company over time. But it still has some a way to go to prove it. More similar to Uber's business pre-dating the pandemic. So we'll monitor it and love the product and the management team. And like I said, I think they do better in the US than Uber's eats business competitively.

So it's a company with a lot of potential, but maybe a little bit too early for us given the designation that we're looking for in terms of the types of businesses that we think will outperform from here.

- Neutral rating on DoorDash. Price target of 75 bucks. Scott Devitt, great to have you. Thanks so much.