Tourist Dollars: Is There Any Value in Online Travel Companies?
Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the economy recuperates worldwide, online bookings increase and emerging economies offer growing Internet populations, travel-related websites seem poised to grow. Below you will find three particularly popular travel booking sites that hold strong market shares and offer compelling growth prospects for the years to come. The sites are Priceline (NASDAQ: PCLN), HomeAway (NASDAQ: AWAY) and Expedia (NASDAQ: EXPE). Let’s take a look at them and see what they offer.
The travel behemoth
Priceline is an online travel company that offers a wide array of travel-related products like hotels, airline tickets and car rentals. With a market capitalization of over $40 billion and industry-leading margins, returns and growth rates, its management must have done something right. By focusing on the European and Asian travel markets and continuously expanding its international penetration through acquisitions, the firm has managed to outperform its competitors, including Expedia.
One of the keys to Priceline’s success stems on its opaque bidding system, which allows value-conscious travelers to access to good hotels at discount rates and allows recognized travel brands to clear inventory (even at last minute) with significant markdowns without harming their brand image. The other factor that was central to the firm’s above-average growth was its acquisition strategy. The purchases of Booking.com in 2004 and Agoda in 2007 widely increased Priceline’s exposure to the bookings market. In addition, the recent procurement of Kayak should provide “access to high-quality travel shopping traffic, thus increasing the conversion rate for transactions and boosting marketing efficiency" (Morningstar).
Going forward, international markets (particularly emerging economies) and an increasing use of the Internet as a booking platform provide plenty of growth opportunities for the firm. Holding strong operating leverage and a sound cash position while offering an expected average annual EPS growth rate in the 15%-18% range and trading at 28 times its earnings, slightly below the industry average, I would recommend buying this stock for the long-term.
Expedia is second in my list. With a market cap of $8 billion, the firm could be conceived as Priceline’s little sibling. Trading at almost 47 times its earnings, a substantial premium to the industry average valuation, the company offers below-average returns, margins and growth estimates. So is there any value left in this company? I’d say that there is, but would still recommend holding on to this stock.
The company could largely benefit from various factors including the ongoing shift of travel customers towards online booking and an aggressive expansion into the European and Asia-Pacific markets. In addition, its corporate travel business, Egencia, and its opaque-pricing travel site, Hotwire.com, provide further opportunities for growth. Finally, its partnerships with Groupon and AirAsia will help it better penetrate the price-sensitive leisure travel segment.
Several other elements aside from its valuation discourage me from buying the company's stock, however. Amongst the main reasons to stay away from this stock, I would highlight:
- Google’s entry into the already competitive online travel market;
- the seasonality inherent Expedia’s business;
- its high dependence on the somewhat saturated U.S. market;
- the substantial amount of litigation that the company faces; and
- the “gradually deteriorating average daily rates (ADRs) due to the addition of lower-range hotels in Asia and economic pressures in Europe” (Zacks).
HomeAway is a worldwide leader in the vacation rentals business. Compared to other internet-based marketplaces, HomeAway is valued cheap. However, trading at 53 times consensus earnings, the stock still seems overvalued. Expected to deliver an average annual EPS growth rate in the 28%-33% range over the next five years, are these shares a buy? I’d say they are.
The company seems poised to meet the projections, mainly on the back of an increasing internet traffic globally and a trend towards online travel booking. Moreover, the management recently announced that the firm will soon start offering higher-margin services, like insurance and maintenance, in Europe. Other markets like Asia and South America provide plenty of growth opportunities as well, and HomeAway has already been making an incursion in the field. Added to an acquisition strategy, other initiatives that promise to increase revenues include the pay-per-booking policy and scale-related cost-cuts.
Another webpage owned by the company, VRBO.com (Vacation Rental by Owner) “has transitioned to a new platform and following a few defections during the transitioning process is well prepared for new growth due to the new tiered pricing. The company expects to offer 100% tiered subscription on its websites in the future” (SeekingAlpha.com).
CTrip.com (NASDAQ: CTRP) deserves a special mention in this list. As the leading travel service provider in China, upside potential is much as demand continues to grow. Expected to deliver a 10%-15% average annual EPS growth rate over the next five years, I'd advocate on keeping a close eye on this company. Although it is recommended to hold at the moment, mainly due to its above average valuation, at 40 times its earnings, several catalysts make it an interesting investment opportunity. If the stock price declined, an attractive entry point would open for investors and you wouldn't want to miss on it.
A strong brand name and presence in both the online and offline travel industry will help the company outperform its peers in the years to come. Moreover, its scale allows it to leverage over providers, making it less susceptible to economic downturns.
Although all of the above described companies seem poised to benefit from the evolving economic and market conditions, valuation makes HomeAway and, especially, Expedia less attractive than Priceline. Holding compelling growth prospects and little risk factors while trading at a reasonable valuation, I’d recommend adding Priceline stock to your long-term portfolio.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Ctrip.com International, HomeAway, and Priceline.com. The Motley Fool owns shares of Ctrip.com International, HomeAway, 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!