Invest In Travel's Google

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Google (NASDAQ: GOOG) built a multibillion dollar empire by becoming the most dominant search engine in the world. Now, The Priceline Group (NASDAQ: PCLN) has taken a page from Google's playbook with its purchase of the travel search engine Kayak. Priceline's smaller size should not be considered a downside, as it allows the company to dominate the travel market in ways that Google cannot.

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The Google Story

European regulators want Google to provide clear labels and provide greater visibility for competitors in its search results. Like any profit-seeking firm, Google would like to control the entire online experience from a search for cheap flights on Google.com to the booking of the flight on Google Flights. 

The problem is that Google has such control over the search market that it can effectively shutout competitors and substantially decrease consumer choice. In the name of maintaining a functioning market, Google is being forced to remain primarily a search engine, while letting others provide the content. 

Priceline's Preemptive Strategy

Shortly after the travel search engine Kayak went public, Priceline decided to scoop it up. This is a wise strategic move. It allows Priceline to control the customer experience during the search process at Kayak.com and increase referral traffic to its other web properties. Kayak offers hotels, flights, cars and vacation packages. With a targeted focus on the travel industry, Kayak can offer a smoother experience than Google.

Comscore's latest numbers show that Kayak's and Priceline's combined pageviews place the company just behind Expedia (NASDAQ: EXPE). Expedia has been losing ground lately, partly due to its spinoff of Tripadvisor and partly due to struggles with Hotwire. With falling bandwidth and server costs, Expedia has seen an increase in competition over the past couple of years. Also, more of its competitors are buying TV ads.

Priceline's and Kayak's market share being just behind Expedia is a positive factor for investors, and helps to justify Priceline's price to earnings (P/E) ratio around 30. Even if the travel industry does not have blockbuster years ahead, the new Priceline will be able to grow by eating up its competitors.

The Financials 

Expedia is in a tough spot. The company is profitable, but its profit margin of 3% and earnings before interest and taxes (EBIT) margin of 5.6% are very slim. While its earnings per share (EPS) are expected to recover to $2.37 in 2013, it is still trading at a forward P/E ratio around 20.

Priceline is fundamentally in a better position than Expedia, and its 2013 forward P/E ratio around 24 is not outrageous. Kayak's growth will help support Priceline's EBIT margin of 34.2% and profit margin of 26.9%. 

Comparing Google's financials to these companies is a bit like comparing apples to oranges. Google is a global search engine across many verticals, with side experiments as an internet service provider. Google has an EBIT margin of 24.3% and a profit margin of 21%, but these numbers are dragged down by its Motorola division. The company has lower growth prospects than Priceline due to its large size, but its balance sheet is clean, with a total debt to equity ratio of 0.06.

Conclusion

While Expedia is struggling, Priceline is growing. Priceline's recent Kayak acquisition will help the company keep competitors away and gain more market share. With a strong growth profile, Priceline is more attractive than Expedia. Google is another profitable and powerful tech company, but its days of high growth are fading away as it becomes a stable large cap. 

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Google and Priceline.com. The Motley Fool owns shares of Google and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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