Hook & thesis
Expedia’s recent quarterly print shows the company is earning real money from its core online travel agency franchise. In Q3 2025 Expedia generated $4.412B of revenue, $1.036B of operating income and $964M of net income (diluted EPS $7.33). At today's market price (close $285.52 on 01/05/2026) the implied market capitalization — using diluted shares of ~131.0M — is roughly $37.4B. If you annualize Q3 2025 net income the simple P/E sits in the high single digits.
My trade idea: the market is under-discounting Expedia’s earnings power. This is a defined-risk long for investors who believe travel demand remains structurally healthy, margins stay resilient, and management continues to monetize its distribution and advertising mix. Entry, stop and targets are below.
What Expedia does and why the market should care
Expedia is the world's second-largest online travel agency by bookings, with lodging accounting for roughly 80% of 2024 sales and advertising representing ~7% of revenue. The company operates Expedia, Hotels.com and Vrbo, along with metasearch brand Trivago. Transaction fees for booking flow drive the bulk of sales and profits. That asset mix matters: lodging bookings are high-margin, recurring in seasonality, and benefit from pricing power when demand is tight.
Investors should care because the math is attractive. High-margin transaction revenue plus an advertising business that can scale without proportional incremental cost means modest top-line growth can flow through to outsized operating income gains. Q3 2025 illustrated this dynamic: $4.412B of revenue produced $1.036B of operating income - an operating margin north of 23% for the quarter.
The numbers that support the thesis
- Q3 2025 (09/30/2025 filing 11/07/2025): Revenues $4,412M; Operating income $1,036M; Net income $964M; Diluted EPS $7.33; Diluted shares ~131.014M.
- Balance sheet snapshot (09/30/2025): Total assets $25.108B; Liabilities $22.515B; Long-term debt ~ $6.216B; Equity attributable to parent $1.337B.
- Cash flow notes: Q3 2025 showed net cash flow from operating activities of -$497M (seasonality and working-capital cadence), while earlier quarters in 2025 showed materially positive operating cash (Q1 and Q2 combined had sizable operating cash inflows). Net cash flow for Q3 was -$1,193M reflecting financing and other items.
- Dividends: Expedia runs a quarterly dividend of $0.40 (latest declaration 11/06/2025), annualized to $1.60 - a modest yield but a sign of capital return discipline.
Putting the valuation pieces together: using diluted shares of roughly 131.0M and the 01/05/2026 share price of $285.52, Expedia’s market capitalization is approximately $37.4B. If you conservatively annualize Q3 net income (964M x 4 = ~$3.86B) you get a back-of-envelope P/E around 9.7x. Even allowing for seasonality and smoothing, that is a low multiple for a business that can generate high incremental margins on growth and has an asset-light model compared with traditional travel businesses.
Valuation framing - why the multiple feels cheap
There are two ways to view the current valuation disconnect:
- Fundamental: Earnings in Q3 were strong ($964M net, $1,036M operating income). Annualized, those numbers imply a sub-10x P/E at current market cap — cheap for a high-margin, cash-generative platform once seasonal cash swings normalize.
- Risk-adjusted: The market appears to be pricing in either a) meaningful downside to travel demand, or b) sustainability risk in margins and cash flow (Q3 cashflow was negative). Those are legitimate concerns but the company’s historical cash flow and the recurrence of high-margin lodging revenues argue that Q3 profitability is not a one-off.
Note: direct peer multiples are not provided in this dataset; qualitatively, Expedia should trade at a premium to asset-heavy traditional travel services and a meaningful discount to the highest-growth marketplace names if growth stalls. The present multiple argues the market expects a deceleration or repeated cash-flow volatility.
Catalysts that could re-rate the stock
- Stronger-than-expected Q4 / FY 2026 results showing repeatable operating margins and positive free cash flow conversion across a full year.
- Progress on advertising revenue monetization and Vrbo dynamic-pricing improvements that lift revenue per booking without proportional cost increases.
- Management moves to reduce net leverage (targeted debt paydown or redirected buybacks) that materially lower interest burden and improve equity value.
- Evidence of sustained corporate travel recovery and higher average daily rates in lodging that boost both transaction fees and platform take-rates.
- Analyst upgrades and a sentiment shift as the market recognizes recurring profitability instead of viewing results as seasonal noise.
Actionable trade plan (defined-risk long)
Thesis: Buy Expedia on evidence the company can sustain Q3-level profitability and translate it into annual free cash flow; the market is underpaying for that earnings power.
Entry: 270 - 290 (use limit orders inside this band; current close 01/05/2026 = $285.52).
Initial stop: 250 (about 12-14% below current/upper entry). Tight enough to limit downside if travel sentiment deteriorates materially).
Targets:
- Near-term target: $320 (first take-profit, ~12% from 285) - thesis validated if upcoming quarter shows repeated operating margin strength.
- Medium target: $360 (second take-profit, ~26% from 285) - likely if company converts margins into sustained FCF and management tightens leverage.
- Stretch target: $420 (longer-horizon upside, ~47% from 285) - scenario where both revenue growth and margin expand meaningfully and multiple re-rates toward mid-teens on stronger confidence in recurring earnings.
Sizing note: This is a medium-risk, event-driven trade. Consider position sizing that limits portfolio exposure to company-specific operational or macro travel shocks.
Risks and counterarguments
- Seasonality and working-capital swings: Q3 2025 operating cash was -$497M, contrasting with much stronger operating cash earlier in the year. If working-capital swings persist, free cash flow may remain volatile and investors could demand a lower multiple. That is the most immediate counterargument to a valuation re-rate.
- Macro/Travel demand risk: A recession, sustained decline in corporate travel, or material drop in international travel could reduce booking volume and ADRs, compressing high-margin lodging revenue and hurting profitability.
- Competitive pressure: Booking, Airbnb and others continue to pressure fees, distribution economics, and supply-side dynamics (especially in alternative accommodations). Any meaningful market-share loss or fee compression would hit margins.
- Regulatory/tax exposure: OTAs are exposed to local tax regimes and lodging collection rules; legal or tax changes that shift liability or increase costs for OTAs would compress returns.
- Leverage and refinancing risk: Long-term debt of roughly $6.2B (Q3 2025) is material. If cash generation weakens materially, the balance sheet becomes a constraint for capital returns or buybacks.
Counterargument: the low multiple may reflect legitimate worries about cash-flow volatility and seasonality rather than a pure valuation mispricing. If Q4 and FY 2026 do not show consistent cash conversion, the apparent cheapness could be a value trap.
Conclusion and what would change my mind
Stance: Tactical long. Expedia’s Q3 2025 demonstrates the company can deliver high operating income from recurring lodging transactions plus growing advertising revenue. At a market cap near $37.4B and a simple annualized net income run-rate implied by Q3, the stock sits at a low single-digit-to-teens valuation that appears to lag the company’s earnings power.
I will be proven wrong if the following materialize: sustained negative operating cash across several future quarters (not explained by predictable seasonality), clear structural share loss to low-cost competitors, or a deterioration in lodging pricing power. Conversely, if management converts Q3-level margins into consistent full-year free cash flow, reduces net leverage and executes on higher-margin advertising and Vrbo initiatives, I would upgrade the trade to a larger position and raise the medium-term price target.
Key monitoring points: next two quarterly prints for (1) operating income margin durability, (2) free cash flow conversion, and (3) any commentary on debt repayment or buyback cadence.
Disclosure: This piece is for informational purposes and is not personalized financial advice. Investors should do their own research and size positions to match risk tolerance.