The shift of travel booking and other related services online has been dramatic with over a third of hotel reservations being made online. “Domestic online travel spending accelerated to a 12% y/y growth rate in April and has persisted at that 12% y/y growth rate essentially through year-end,” according to comScore. This is an industry and trend we are eager to ride out and in spite of economic uncertainty, we expect both domestic and international online travel spending to grow anywhere between 8% to 11% this year alone. Below we look at the major players in the industry:
Priceline (NASDAQ: PCLN) is the behemoth of the publicly traded companies in the space, commanding a $37.8 billion market cap. PCLN owns booking.com, which is among the top paid search brands in Germany and the UK. Booking.com is on track to add an estimated 20,000 hotels last quarter and now has over 200,000 hotel relationships, indicating inventory growth north of 50% q-o-q. For reference, in previous quarters, the rate of incremental hotel additions has ranged from 15,000 to 18,000. Coming out of Q4, there was a lot of uncertainty regarding growth in the face of macro headwinds in Europe and market share in Europe, but we believe PCLN will meet its inventory growth targets. Moreover, we expect booking.com will leverage its dominance in the European travel market to gain better traction in the US and Asia. The Asia business has been growing nicely, primarily operating through agoda.com. Hotel inventory in Agoda Asia Pacific was up 80% y-o-y but was down from 85% in Q4. From a valuation perspective, we think there is additional upside for the stock from multiple expansion. Historically, PCLN has traded in the 8.0x to 24.0x range, and we believe it could trade to 22.0x on 2013 earnings on contributions from Asia-Pacific and Latin America. PCLN is our favorite in the online travel media space and is held by Chase Coleman, Philippe Laffont, Paul Reeder, and J Kevin Kenny.
Expedia (NASDAQ: EXPE) is another online travel agency (OTA) and has a $5.4 billion market cap. Since reporting Q1 earnings last week, the stock is up over 30% compared to S&P 500 performance of negative 0.1%. We are left wondering where additional upside will come from and cannot locate a source at this time. It seems to us that the street is far too bullish on EXPE’s ability to deliver continued growth apart from the significant discounting that we have seen. Revenue per room per night was down 6%, likely due to the continued discounting.
Investors were excited by the announcement of a ~850 million share buyback program (20 million shares) at current price levels. Ostensibly EXPE has ~$1.9 billion of cash in the US but ~$1.6 is categorized as deferred merchant bookings, meaning not cold hard cash. We will be interested in hearing additional management commentary on the financing aspect. Ultimately, the valuation is not compelling to us. Pre-Q1 earnings, EXPE was trading at ~6.0x forward EBITDA. Post-Q1 earnings, EXPE traded at ~8.0x forward EBITDA. Keep in mind that guidance did not change and that the beat on the EBITDA front is mostly attributable to a one-time cost efficiency in sales and marketing.
Orbitz (NYSE: OWW) is one of the smaller OTAs with a $377.8 million market cap that offers services to both business and vacation travelers. Historically, it has derived the vast majority of revenues from the US travel market and lower-margin air ticket sales, but at long last, it is turning its focus toward the international hotel industry. OWW generates only about 36% of revenue from hotels compared to domestic peers that post numbers in the 65% to 90% range. If OWW is able to add revenues from high-margin hotel bookings, manage its sales & marketing expenses, and continue to grow its private label partnerships, we think it can improve profitability this year. The private label partnerships involve partnering with travel suppliers to display its hotels on third party websites i.e., American Express Travel, Amtrak, Hawaiian Airlines, and Virgin Australia. Fees from these partnerships have the potential to enhance revenue growth this year. Though there are decent growth prospects on the horizon, we remain concerned over its ability to convert these ventures into meaningful earnings growth drivers.
TripAdvisor (NASDAQ: TRIP) was spun out of EXPE last December and has a $5.0 billion market cap. TRIP lays claim to the largest online travel community with over 40 million monthly unique visitors to its sites. TRIP has a huge database of over 50 million reviews and other user-generated content. However, we point out that the travel review space is becoming an increasingly crowded space, especially with the acceleration of social media adoption. Additionally, uncertainty regarding pricing and demand after the spin-off remains. In Q4, TRIP indicated that EXPE lowered its cost per click (CPC) pricing by 10-15%, which would in turn lower its revenues by 5%. In Q1, EXPE reported ~$51 million of spending with TRIP, representing a ~5-6% decline y-o-y. The question is whether other OTAs have increased their ad spend with TRIP post-spin to offset the decrease from EXPE. The Q1 call will be held this evening. We will be listening for commentary on online hotel searcher growth, any noticeable changes in online traffic as a result of Google’s ad format changes, and the progress of investments in international expansion into China and vacation rentals.
Google (NASDAQ: GOOG) may not come to mind as a competitor in the space but with its $700 million acquisition of ITA Software in July 2010, it entered the online travel market. Currently, you can’t book through the site rather the software creates a clean interface for finding flight information online. For now, GOOG won’t be setting airfare prices and has no plans to sell airline tickets to consumers. The company’s plans for this new area are unclear.
