OTA Stocks to Watch in 2013
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Online Travel companies have had a good run last year with Expedia's (NASDAQ: EXPE) stock doubling and Priceline (NASDAQ: PCLN) giving 30% plus return. The future looks bright for these companies as there are many opportunities from the international markets for the online travel business. Europe and the emerging markets, such as the Asia-Pacific and Latin America, are still under penetrated. Additionally, the transition of bookings from offline to online offers substantial room for growth. I believe both Expedia and Priceline are likely to see continued momentum in 2013. However, I am slightly more bullish on Priceline given its international exposure (international bookings for Priceline accounts for 80% of total bookings). Here's a look at some of its important growth drivers.
Priceline Growth Drivers
Priceline has several factors working in its favor both from the OTA industry and company specific perspective. The acquisition of Booking.com has been most profitable for the company placing it in a dominant position in the European market. It has helped the company to evolve from once being a mere North American air-centric business into an International hotel-centric business.
Highlighting the Kayak deal, it also brings several growth avenues for Priceline. The growing traffic share of Kayak in the United States, profitability and value to consumers will account for Priceline's extension in the near term.
Priceline vs Expedia
Coming onto the competitive landscape, Expedia's brands are leading in the US market in the category of most used and best liked hotels. Expedia is getting more aggressive with customer acquisition with its mobile app. The increasing trend of smartphones has forced every online site to be compatible with the mobile platforms. Looking at this Expedia has launched apps for iPhone and Android users. Through the Expedia App, it allows users to choose from a wide variety of flights and hotel options. The app is now expanded for Windows 8 users also where they can access to 140,000 hotels and mobile deals up to 60% off. But, Priceline's hotel inventory has significantly grown from 20K in 2005 to 245k as of Q3 2012 and is further expected to reach 255K by the year end while Expedia's Venere.com has only 52K hotels in 2011. Booking.com signs up hotels into its platform under the agency model that is more preferred by the hotel operators due to its flexibility. Also, Priceline has a more experienced sales team contributing to the increase in hotel count.
Growth in Booking.com
A major driver of growth for Priceline’s revenue and market share has been Booking.com. In the last two years, Priceline has had tremendous growth in its hotel count through its Booking.com. It has added ~7500 hotels bringing the total count to 252K till date. And by 4Q 2012, it will have 255K hotels with a year over year growth of ~40%. Also, what impresses more about Booking.com is that there is no heavy marketing behind it. The growth is also aided by online bookings. It has grown more than seven folds and is expected to continue this going forward. The total hotel room nights booked in 2006 was 18.7 million which has increased to 141.6 million in 2011 marking a year over year growth of 52%.
Priceline has a dominant position in the European market that is still unsaturated offering more growth years. The first nine months growth for 2012 is ~60% which indicates that Priceline has sold 12% of all European nights this year. When compared with the US market the entire OTA channel is only 12-13% of total stayed room nights. So the figure weighs heavy on Priceline’s exposure which is under construction in Europe.
Exposure to Airline Industry
Priceline has a low risk factor due to its much smaller exposure to airlines. Its total bookings from air are ~5% only, therefore any breakdown in the airline industry whether it is bankruptcy or lower booking commissions would least affect the OTA. Conversely, this lower exposure would result in higher margins as compared with other OTA’s having higher greater exposures. There is much lower commission in air bookings i.e. only $5 on an average ticket price of $250 for domestic and $1950 for international flights whereas hotel commissions run in double digits.
As opposed to the airlines, Priceline finds more growth in its rental cars segment which has seen healthy growth since its acquisition in 2010. The segment represents a very small portion of the business offering a room for growth in Europe. The rental car rates are parallel to the hotel rates, so fundamentally and financially more beneficial from the air business.
Google's Entry in Online Travel
Priceline and other OTA's can face stiff competition with the entry of Google (NASDAQ: GOOG) into the online travel segment. Following the acquisition of ITA, a flight search software maker, Google is testing out its Flight Explorer service allowing travelers to search for more travel options. It also let travelers search for cheaper flights and look for on flight features available. Google has also launched a meta-search service for hotel bookings called Hotel Finder. In addition, its Google+ Local offers users to discover and share places. With Google+ Local, users can also post images and share reviews of locations directly to the page. Furthermore, Google has integrated Zagat reviews and ratings to the Google+ Local. Though Google+ Local is very useful for small businesses, but these services are not running at a pace like the search engine is doing. It will still take time for a perfect take off but then also, OTA have to be prepared to combat with the upcoming threat.
In conclusion, Priceline and Expedia are the US market leaders and will continue to gain the market share. Priceline brands and Expedia brands have grown their OTA traffic share from Google travel search by 269bp and 118bp. On the other hand Google is moving deeper into the vertical travel search and investing aggressively to make a foothold. But Priceline's scale in the global online market is not easy to replicate with its significant presence through the successful acquisitions (Booking.com, Agoda, Carrentals.com) and also through its organic growth. Also, Expedia brands have high recognition in hotel search and hotel booking. Therefore, investors have less to worry about the growth potential in Priceline and Expedia.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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