It’s not often you get a second shot at a business model that revolutionized an industry – and made investors rich. Yet that’s precisely what Priceline.com Inc (NASDAQ:PCLN) offers.
Why it’s a core holding
Priceline revolutionized the way people make travel reservations. In the past decade, Americans and Europeans said goodbye to their old-fashion travel agent and began making their trip arrangements online.
During that time Priceline.com Inc (NASDAQ:PCLN) emerged as the perfect market-maker. For consumers, Priceline was a simple and quick way to find great deals. For businesses like airlines and hotels, Priceline allowed them to clear inventory anonymously without damaging their brand.
The formula was incredibly successful and shareholders profited handsomely. Now Priceline wants to apply the same business model to international markets. Strong positions in the world’s hottest economies make the company the fastest growing online travel agency, or OTA, in the world.
China is an even bigger prize. According to analysts at Hogg Robinson, China will surpass the United States as the world’s largest travel market by 2020, growing at a 16% compounded annual rate during that time frame.
Priceline.com Inc (NASDAQ:PCLN) has boosted its presence in the country through a new partnership with Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). The deal will give Ctrip.com access to Booking.com’s 235,000 hotels in 170 countries – up from the 50,000 the company has currently.
The partnership is truly a win-win for both companies. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has secured its position as the biggest online travel agent in China. According to iResearch China, the company owns over 45% of the online travel market in the country. Meanwhile Priceline gains exposure to the globe’s most important travel market.
Priceline.com Inc (NASDAQ:PCLN) is also expanding operations in the industry’s fastest growing geography – Latin America. According to eMarketer, less than 20% of travel reservations are made online, and the market is projected to grow 30% annually through 2016.
But Priceline has also developing sustainable competitive advantages that it will be able to exploit for years to come.
First, the company’s enormous reach: Last quarter Booking.com – a Priceline property – reported 245,000 hotel partners, up 44% from the previous year. This is a network business where consumers gravitate towards the largest platforms with the biggest inventories.
Second, scale: Costs in this business are largely fixed so the bigger you are the bigger your returns for shareholders. As the largest player in the industry, Priceline.com Inc (NASDAQ:PCLN) has consistently posted better operating results than its peers.
Risks to watch
Of course when dealing with such an aggressive growth stock there’re always risks that investors have to be on the lookout for.
Could Google Inc (NASDAQ:GOOG) disrupt the travel industry? The company has been gaining influence in the business through its purchase of Zagat, Panoramio and ITA Software. If Google can harness the awesome power of its search engine, YouTube, and other services the company could upset the balance in the industry by offering a better, simpler service.
Google Inc (NASDAQ:GOOG) certainly has the scale and resources to execute on its vision. If successful, it could grab a significant slice of the industry, and travel may represent a huge hidden catalyst for the stock.
However, Priceline has taken steps to address the Google threat. In May, the company completed its $1.8 billion acquisition of Kayak. Rather than partner with airlines and hostels directly, Kayak tallies offers from other travel agencies – Priceline, Expeida and Orbitz – and complies it in one place. Kayak is essentially a search engine of search engines.
The acquisition is smart for two reasons. First, Kayak will reduce the amount of money Priceline pays Google for online advertising. Second, Kayak will secure a steady stream of traffic to Priceline websites regardless of what Google does.
Foolish bottom line
Despite these risks, Priceline.com Inc (NASDAQ:PCLN)’s compelling growth story and sustainable competitive advantage mean this stock should be added as a core holding to your portfolio.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), Google Inc (NASDAQ:GOOG), and Priceline.com. The Motley Fool owns shares of Ctrip.com International, Google, and Priceline.com. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 7 Core Growth Stocks for Your Portfolio – Priceline originally appeared on Fool.com and is written by Robert Baillieul.
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