Expedia Investors Cheer Management Shake-Up

Despite confidence in interim CEO Barry Diller and the 7% increase in Expedia EXPE shares, we are disappointed that CEO Mark Okerstrom and CFO Alan Pickerill have been removed over a disagreement with his strategy of integrating its brands and technology, which we found to be a prudent long-term decision. We plan to maintain our $170 fair value estimate, leaving shares undervalued, as we evaluate Diller’s strategic plans (which we expect to be communicated during the company's February earnings call).

Expedia's board believes the strategy to integrate its brands and technology caused meaningful disruption and led to a weaker third-quarter performance and outlook. In our view, third-quarter results were solid (two-year stacked booking growth and marketing ROI trends intact), and we attribute the weaker outlook to the inherit quarterly volatility of managing marketing channels and Expedia's relatively higher organic search traffic exposure versus an incorrect strategy.

Further, narrow-moat peers TripAdvisor and Booking have been implementing a similar strategy of integrating its brands and technology, which we think can add long-term value through sharing of best practices and a fully connected trip. That said, we hesitate to define Expedia's decision to reverse its strategy as one that will meaningfully affect its long-term competitive positioning. We think it will be more important that Expedia continue its investment into international markets and we would become incrementally positive if Expedia invested more to build out its experiences content, as we see these strategies enhancing its long-term network effect, the source of its narrow moat.

While we had a high opinion of Okerstrom, investors are likely in solid hands with Diller, who has been Expedia's chairman since 2005 and was an advisor to TripAdvisor during 2013-17. Further, we see it as a positive that Diller plans to increase his personal ownership of Expedia stock.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.