Which Online Travel Company Has Upside?
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Web-based airfare and hotel reservation and information specialists, a sector launched and previously dominated by Priceline.com (NASDAQ: PCLN), continues to expand. A quick look into some of the key participants in that market reveals improving metrics, such as subscribership and advertising revenues. They are high margined for the most part and growing. Take caution, though, and consider the volatility of these stocks when making selections. With numerous upstart companies and spinoffs over the past few years, and the pace of income gains starting to slow, it will be an interesting sector to watch.
TripAdvisor LLC (NASDAQ: TRIP)
TRIP generates about 75% of revenue from click-based advertising, and another 10% from display ads. The favorable ad environment, along with a shift in spending to Internet sites, is supporting the top and bottom lines. In fact, online marketing sites are taking share from broadcast television, radio and other traditional media forms, as evidenced by the solid revenue growth of late at those entities. TripAdvisor’s review service seems to be gaining traction, allowing it to gain from the positive industry momentum.
The attracting of advertisers has been eased by rapid growth in subscriptions, the revenue source contributing the remaining 15% or so of revenues. Those revenues climbed a whopping 56% in the December quarter, and as the customer base continues to rise all else should work in TRIP’s favor, as well.
Wall Street has taken notice, and shares have rebounded significantly since November. There is probably more upside to be found here, nevertheless. Just be wary of choppiness in the near term.
The industry leader hasn’t slowed down much, and when it releases earnings on Feb. 26 investors will know exactly how fast earnings are now growing and are expected to climb. December-quarter results likely jumped nicely on increased bookings revenue from its Booking.com website. Expecations are that share net fell between $6.12 and $6.57, versus $4.91 in the prior year. On that note, Priceline has significantly exceeded earnings estimates over the past few quarters.
Await the news on the 26th, with likelihood being that revenues will continue to soar at a solid double-digit rate this year. Regardless, the business model allows for very robust gross margins, a factor driven by a low fixed-cost base. The shares appear to remain a good buy and hold for the long term.
Some of the further companies worth mentioning in this group include Expedia (NASDAQ: EXPE), a company that saw its stock soar last year. Expedia operates Expedia.com (an online travel agency), Hotels.com (a hotel booking service), and Hotwire (a discount travel service), along with several other travel related businesses. It realizes the bulk of revenues from hotel bookings and is pursuing a growth strategy based on product innovation, global expansion, and new channel penetration. TripAdvisor is a spinoff of Expedia.
Additionally, Kayak (NASDAQ: KYAK) has a decent profit growth outlook, as its query revenues are climbing at a strong pace. Mobile business is providing a growth engine through downloads of its mobile applications. Kayak realizes revenues from the sending of referrals to travel suppliers and agents, along with generating advertising revenues. The shares, however, have already priced in much of the long-term growth that may be in store, limiting their appeal. One of Kayak’s fellow companies is Travelzoo (NASDAQ: TZOO), offering travel information, and receiving advertising revenues. TZOO’s earnings are apt to decline year over year in the short term, as it invests in its products including the mobile and hotel operations. The shares are still reasonably valued and could jump on earnings surprises. We recommend them for the long haul.
Our exploration of the online travel sector indicates a few companies with exceptional business models that have gained recognition by investors, as well as a few that offer information primarily and are building their distribution effectively. It is important to consider the stock valuations as a prospective investor. That said, there may be some opportunity to exceed market averages should earnings continue to better expectations.
dctotal has no position in any stocks mentioned. The Motley Fool recommends Priceline.com and TripAdvisor. The Motley Fool owns shares of Priceline.com and TripAdvisor. 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!