Why now is the time to start uncovering smaller companies around the world (and 2 great examples)

Expedia (NYSE: EXPE)

Expedia is a company that I have owned for over a decade and has been in our fund at Profeta for the past couple of years. The company has been a consistent performer with a strong management team tripling its earnings over the past decade and maintaining its strong market position in online travel globally. 

Despite this consistent performance, the stock price has only doubled over the past ten years as the valuation has fallen from a price-to-earnings ratio of over 20x from 2012-2018 to only 12x 2024 today. 

This compares to peers such as Booking Holdings (NYSE: BKNG) and Airbnb (NASDAQ: ABNB), which still trade above 20x. Airbnb emerged as a new competitor over the past decade and Booking.com has been a fierce competitor, but Expedia has done a commendable job continuing to grow in the US and internationally. They are expected to deliver 40% earnings per share growth in 2023 and 28% in 2024, which is quite impressive. In their third quarter result announced in November, Expedia delivered 9% revenue growth, 21% net income growth and 33% earnings per share growth.

While most people would know of the core Expedia brand and its online portal allowing you to book accommodation, flights and other related travel products, the company has evolved over the years to include a variety of brands such as Vrbo, hotels.com, Stayz, Wotif and Car Rentals.com on the business to the consumer side. They have about two million alternative accommodation listings through Vrbo and one million hotel and other accommodation listings on their other brands. 

They also have a sizeable business-to-business division called Expedia Partner Solutions to make travel services available through third-party branded websites. Expedia has been working over the years to integrate all their brands onto one technology platform and unify their loyalty programs into one global program called “One Key”. We are starting to see the benefits of Expedia’s investments in technology and marketing over the past few years. They are both helping to drive revenue growth as well as delivering operational efficiencies with margins improving. 

While I have been frustrated with Expedia’s lack of detail about each listing compared to booking.com such as the size of each room and individual pictures, I was pleasantly surprised to see these issues fixed over the past few months. From a consumer’s perspective, Expedia now has a best-in-class offering with its scale in a number of listings and technology improvements.

Expedia is an owner-managed business and the company is run by a proven management team. Barry Diller is the chairman and owns 27% of the voting power of the company. He has successfully steered the company for the past few decades and stepped in to steer the company as an executive chairman during the 2020 COVID period. 

Peter Kern has been Expedia’s chief executive officer since 2020 and has been a director of the company since it was listed in 1999. We have been impressed with the improvements Peter has made for the company over the past three years and expect the company to continue to grow profitably in the United States and international markets. 

Given that the stock price has not reflected the increase in the value of the company as earnings continue to grow quickly, the board has prudently been buying back shares. They recently approved a $5 billion share buyback. We love investing in leading online businesses that generate strong free cash flow and have a savvy board that allocates capital effectively to maximise shareholder returns. 

Stoneco (NYSE: STNE)

Stoneco is a leading financial services and technology provider in Brazil. We have been following the company since its listing in 2018 and were provided with a wonderful opportunity to buy shares in the company this quarter. Stoneco started as a merchant acquirer in the financial payments sector and quickly took market share from the incumbents in the small to medium business market with their unique hub distribution offering providing first-class customer service to Brazilian customers. 

Since the IPO, they have evolved their technology into an advanced cloud-based technology platform offering terminals to connect and process payments for merchants as well as software that serves as a customer relationship management system as well as software that helps the merchant manage their own business, following the acquisition of Linx. They now serve over 2.6 million clients in Brazil out of the 13.9 million micro and small businesses in Brazil.

Stoneco is a growth stock currently trading at a value price. Since the IPO in 2018, the company has increased revenue by more than five times and earnings per share has tripled. Yet the share price is half of what it was on listing in 2018. 

Over this period, they have taken share in the SMB market, launched new software products, entered into the banking market offering deposits, credit cards and loans and have recently entered the micro merchant market with their Ton product, which is quickly taking market share. At the company’s investor day in November, they set out a plan that should deliver 31% net income growth per annum from 2024-2027. We expect to be happy long-term shareholders in the company.

Stoneco is led by an entrepreneurial management team. It was founded by its Chairman, Andre Street, in 2000 who is a fintech entrepreneur. Before its IPO, it attracted an investment from Berkshire Hathaway (NASDAQ: BRK/A), which still owns 4% of the company. 

Pedro Zinner is the chief executive officer and has more than 25 years of experience in strategy, risk management and finance. Like Expedia, the company see their stock as undervalued and has been buying back shares. In November they announced an additional R$1 billion share buyback program.