Ready for Takeoff: Betting on the Online Travel Revolution

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The web has changed the way we search for information and make travel reservations of all kinds: hotels, rentals and flights for example. Online reservations are easier and faster for travelers, and pricing – a huge factor - is also more efficient, so there are solid reasons to expect the online reservations business to continue gaining share versus the traditional methods over the next years. Priceline (NASDAQ: PCLN) is one of the strongest names in the business, and the company offers some exciting growth opportunities in the middle term.

Gaining Altitude

Priceline is one of the most successful growth stories in the online travel business. The online booking company has compounded sales at more than 30% annually over the last five years, while earnings per share grew even faster at nearly 65% annually during the same period. The company has done much better than competitors like Expedia (NASDAQ: EXPE) and Orbitz Worldwide (NYSE: OWW), and it has a rock solid competitive position in Europe with, which generates nearly 80% of Priceline´s overall profitability.

Priceline has recently announced the acquisition of Kayak Software (NASDAQ: KYAK) for $1.8 billion. Kayak is a popular search engine which allows customers to compare information from different sites regarding pricing and availability of plane tickets, rentals, hotel reservations, etc. The search engine is very strong in plane tickets, while Priceline focuses more in Hotels, so there could be some interesting synergies there.

But there is much more than money involved in the acquisition. Priceline is gaining access to valuable data regarding travelers' needs and price sensitivity among other things, and this is an important asset when it comes to making the service more efficient and profitable. The Kayak acquisition makes much more sense from a strategic point of view than from a purely monetary perspective.

Besides, the acquisition is a defensive move versus Google (NASDAQ: GOOG). The online search giant is making inroads into the industry with different flight and hotels search services. Although Google is unlikely to get into the transactions business, it’s a much bigger company with tremendous competitive strength, so Priceline needs to watch Google very closely.

Expecting Some Turbulence

Priceline has gained an edge versus competitors with this last move, but there are some concerns regarding possible retaliations. Spending money in Kayak will be a much tougher decision for these companies now that it's owned by Priceline, and their short term contracts make it relatively easy to depart.

At a 29% premium over the market price, Priceline has paid dearly for Kayak. The acquisition price of $40 puts the stock at a sky high valuation with a P/E ratio above 55. The purchase is already an expensive one, and it could become even costly from a financial point of view if Kayak loses some clients in the middle term. Besides, Kayak´s profit margins are nearly half those of Priceline, so the deal will probably have a negative effect on profitability.

However, the company has a successful track record when it comes to integrating acquisitions, and the deal makes sense from a strategic point of view. Even if profit margins will be under pressure over the coming quarters, Priceline is still going in the right long term direction.

Bottom Line

The online travel revolution is here to stay, and Priceline is one of the biggest beneficiaries from that trend. The Kayak acquisition will generate some uncertainties in the short term, but the company is making the right strategic decisions and investing for growth. So take a seat by the window, fasten your seatbelt and enjoy the flight.


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