If you are like me, then you usually plan your trips via big online travel companies such as Orbitz Worldwide, Inc. (NYSE:OWW) and TripAdvisor Inc (NASDAQ:TRIP). Even though I still occasionally use travel agents for international flights, the majority of my flights and hotel bookings are done via online travel sites. Considering the little growth in the U.S airline business, will these online-travel companies continue augmenting their revenue?
During 2013, online-travel companies have done very well in the stock market: Shares of TripAdvisor jumped by 86% (to-date); Orbitz Worldwide, Inc. (NYSE:OWW)’s stock spiked by 239%. Finally, shares of Priceline.com Inc (NASDAQ:PCLN) sharply rose by 49.5%. Let’s examine the recent developments of the airline industry and see how it could affect these companies’ revenue.
Is the airline business taking off?
On the one hand, companies such as Priceline.com Inc (NASDAQ:PCLN) are paid mostly for booking flights, hotels and car rentals. So if the number of passengers increases, this trend behooves Priceline. On the other hand, fewer flights and very moderate growth in the number of passengers won’t be enough for online companies to maintain high revenue.
Moreover, airline fares remained nearly unchanged in the first quarter of 2013, which could also reduce the profit margins of online-travel companies such as Orbitz Worldwide, Inc. (NYSE:OWW) and Priceline.com Inc (NASDAQ:PCLN). If this trend persists, it could also curb the growth in revenue.
In terms of growth in revenue and profitability, both Tripadvisor Inc (NASDAQ:TRIP) and Priceline.com Inc (NASDAQ:PCLN) shares similarities: in the second quarter, TripAdvisor’s revenue rose sharply by 25% and its profit margin remained high at 38%. In the first quarter of 2013, Priceline’s revenue also spiked by 25.5% (year-over-year), and its profitability remained stable at 24%. Conversely, Orbitz Worldwide, Inc. (NYSE:OWW) didn’t do well in the first quarter of 2013: the company’s revenue rose by only 6.9%,.while its operating losses were nearly $3 million.
So even though all three companies are in the same industry, their financial performance is very different. The leaders in terms of revenue and profit margins are Tripadvisor Inc (NASDAQ:TRIP) and Priceline.com Inc (NASDAQ:PCLN). Let’s see how these companies plan to expand their operations.
Going international
Using online companies to plan your next trip have become ubiquitous in the U.S. The main growth generator for companies such as Priceline.com Inc (NASDAQ:PCLN) and Tripadvisor Inc (NASDAQ:TRIP) is likely to come from the international arena. Let’s see how these companies are doing on this front.
North American success
Most of TripAdvisor’s revenue comes from click-based advertising, which accounts for 74% of its revenue. But the highest growing segments are subscription, transaction and other revenue that grew by 68% in the past quarter. This group accounts for only 13% of its revenue. But if this high growth rate persists, it will eventually become a significant revenue base.
The company is currently operating in 30 countries including China, under daodao.com. Despite the many countries the company reached, its international revenue didn’t grow by much: international revenue rose by 18.4% during the second quarter (year-over-year). In comparison, North America revenue grew by 32%.
One way the company maintained its growth in North America was by social networks, such as Facebook. But the figures above and the wide outreach suggest the company has much more room to grow in the international arena.
International focus
Most of Priceline’s growth came from its international segment: the company’s international gross profit jumped by 45% (year-over-year). Looking forward, Priceline.com Inc (NASDAQ:PCLN) also projects most of its growth will continue to come from the international segment, which is expected to rise by around 40%. Its domestic operations will grow by only 7%. The slow growth in domestic travels suggests this company will need to keep relying on the international segment to maintain its high growth.
One factor to consider is that in order to expand internationally, these companies’ operational costs are likely to rise – costs such as translating sites to other languages and advertising. This could lower the profit margins of these companies but could keep their growth in revenues high.
Relying on the local market
Orbitz is still mostly relying on the domestic market: in the first quarter, the domestic segment accounted for 74% of its revenue. In comparison, Tripadvisor Inc (NASDAQ:TRIP)’s domestic revenue accounted for only 54% of its total revenues. Orbitz Worldwide, Inc. (NYSE:OWW) projects its total revenue will rise by only 4% to 7% in 2013. If the company can’t augment its operations outside of the U.S, its revenue growth will remain low.
Sustainable growth?
One factor to consider is their debt-to-equity ratios: Tripadvisor Inc (NASDAQ:TRIP) and Priceline.com Inc (NASDAQ:PCLN) have reasonable ratios of 0.4 each. This means that if these companies require additional funding to expand their operations, their debt-to-equity ratios won’t hold them back.
Conversely, Orbitz Worldwide, Inc. (NYSE:OWW)’s debt-to-equity ratio is 31.6 – a very high ratio due to Orbitz’s low equity. Down the line, this could adversely affect the company’s attempts to expand its operations.
The bottom line
Despite the little growth in the number of passengers flying, online-travel companies continue to benefit from the rise in domestic demand for their services. The ongoing rise in the international arena could keep their revenue growing, even though it may also lower their profit margins.
But the growing competition from other companies and a decline in the number of flights could eventually curb growth in revenue. Finally, the high profit margin, sharp rise in revenue and financial stability of Tripadvisor Inc (NASDAQ:TRIP) and Priceline.com Inc (NASDAQ:PCLN) make them appear to be better investments than Orbitz.
Lior Cohen 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.
The article Are Online Travel Companies About to Take Off? originally appeared on Fool.com.
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