This Online Travel Agency Soars Above its Competitors
Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you booked travel online this past July, you did so in good company. Online travel bookings peak in July, and this summer is set to be a record-breaker. U.S.-based travel companies expect $54 billion in online travel bookings in their vital third quarter (Q3) this year, a 10% increase over Q3 last year and an enticing indication of future profit potential.
In 2012 worldwide online travel bookings grew by 7% to over $370 billion. Yet despite the industry’s substantial size and rapid recent growth, it still harbors vast potential. In 2012, online bookings accounted for less than 40% of total worldwide travel sales, which are approaching $1 trillion annually.
Moreover, the U.S. Commerce Department projects the domestic travel industry will grow annually by 6%-8% through 2016, providing another reason for optimism regarding the leading U.S. online booking companies, Priceline.com (NASDAQ: PCLN), Expedia (NASDAQ: EXPE) and Orbitz Wordlwide (NYSE: OWW). These three companies alone combined for over $10 billion in revenue and $1.5 billion in profits in 2012.
Priceline’s Leading International Position
Priceline is the largest of the online travel agencies, with a market capitalization of more than $45 billion and 2012 gross profit of $4.1 billion. The company operates through various brands, including priceline.com, kayak.com, and rentalcars.com to provide discount rates for online bookings of hotels, flights, and rental cars.
Unlike its chief competitor, Expedia, which dominates online travel in the U.S., Priceline’s primary revenue source is international bookings. In 2012 over 80% of Priceline’s $28.5 billion in bookings occurred outside the U.S.
By acquiring large international online agencies, such as the Europe-focused booking.com and Asia-focused agoda.com (among other sites), Priceline has attained a prime position in the fastest-growing markets for online travel booking. In 2012 Priceline’s annual international sales grew by 38% while domestic sales grew by only 7%. Though Europe and Asia have comparable annual travel sales to the U.S., the percentage of those sales booked online in Europe and (especially) in Asia, lag far behind the U.S. Europe and Asia’s low current online booking rates, coupled with their increasing online penetration and fragmented hotel markets (which lend themselves to profitable online booking operations by independent agencies) create enormous growth opportunities for Priceline.
With the largest international presence in the industry, Priceline is in a position to thrive as international online travel booking rates rise to U.S. levels in the coming years.
Expedia’s Quest for International Profits
Expedia, like Priceline, operates through various brands and websites, including expedia.com, hotels.com, and hotwire.com. As mentioned above, Expedia has a stronger presence in the U.S. than Priceline does; in 2012 Expedia accounted for 43% of U.S. online travel bookings compared to Priceline’s 11%. However, the company is intent on shifting the balance of its operations toward faster-growing international markets.
Expedia trumpeted a 36% increase in international revenue to $454 million in Q1 2013, having added 26 international points of sale in 19 different countries in the last two years. Yet despite Expedia’s recent surge of acquisition activity, international revenue sources still contribute less than half of the company’s total income.
Expedia’s current stock price suggests market skepticism that its U.S.-focused business will keep pace with Priceline’s internationally fueled growth. While Priceline trades at a price-to-sales ratio over 8 on revenue of $5.5 billion, Expedia’s ratio hovers around 2 on only slightly lower revenue of $4.4 billion.
Expedia also falls short of Priceline‘s profitability. Priceline has an operating margin of 35%, in large part due to its focus on the highly profitable, fragmented European hotel market. In comparison, Expedia’s operating margin is just 12%. Although Expedia has comparable revenue to Priceline, its lower margins resulted in 2012 earnings that were less than half of Priceline’s. With its slim operating margins, using the price-to-earnings (P/E) metric, Expedia is significantly more expensive than Priceline. Expedia trades at a P/E of 48 while Priceline has a P/E of 32.
With a market cap of just $1 billion, and a price-to-sales ratio of 1.25, Orbitz is significantly smaller and cheaper than Priceline or Expedia. Orbitz has had negative net income in each of the last three years, and has struggled to keep pace with its competitors. A surprisingly strong Q1 2013, in which Orbitz’s quarterly revenue grew by 7% to over $200 million, drove Orbitz stock to triple in value from February 2013 to now. However, it’s still unclear whether Q1 2013 represents a company turnaround, or simply a lucky quarter.
Orbitz’s comeback strategy revolves around the growing mobile bookings business. Tablet bookings have grown from next to nothing to close to 10% of the industry in just three years and they already make up 25% of Orbitz’s $225 milllion in annual hotel reservations. Hoping to further capitalize on its burgeoning niche, in February 2013 Orbitz became the first online travel agency to launch an iPad app that allows travelers to book flights, hotels and rental cars through a single app.
Priceline’s Prized Position
Priceline’s industry-leading operating margins and steady position at the head of fast-growing international markets make it the strongest of the U.S. online travel agencies. Though Expedia and Orbitz each have unique and promising plans for growth, neither can match Priceline’s established position in fast-growing markets and consistent profitability. Investors interested in capitalizing on the growth of online travel booking would do well by purchasing stock in Priceline.
Colin Tweel has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of 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!