The firm was founded as an online clearinghouse that allows consumers to bid for hotels’ unsold rooms and airlines’ excess seats at deep discounts. Consumers make bids sight unseen, allowing the hotels and airlines to sell capacity at below-advertised rates without damaging their brand or cannibalizing published fares.
This traditional business has flagged in recent quarters amid greater competition in the discount ticket business. But sales through discount ticket channels tend to pick up in a lackluster economy.
In addition, Priceline.com’s growth is increasingly driven by its international-focused Booking.com business and recent Agoda and Travel Jigsaw acquisitions. Almost 70% of Priceline.com’s gross bookings of hotel rooms, airfares and rental cars come from outside the US. That amounts to 82% of the firm’s 2010 operating income.
More than half of all U.S. travel spending is now conducted online, a sign of a mature market. But Asian and European hotel markets remain highly fragmented, providing the company with ample opportunity to grow its business. Centralized websites such as Booking.com are an indispensable distribution channel for independent operators that lack multibillion-dollar advertising budgets. Priceline.com can also negotiate more favorable commission rates with smaller operators that have less bargaining power.
Priceline.com has a significant head start in international markets compared to its more domestic-focused rivals such as Expedia (EXPE). As of the end of the third quarter, the company had signed up 170,000 hotel partners, up from about 150,000 at the end of 2010. On a year-over-year basis, the supply of international hotel rooms available through Priceline.com’s websites has jumped more than 60 percent.
In the third quarter of 2011, Priceline.com reported an 88 percent year-over-year jump in net bookings, driven by a 61 percent surge in international bookings. Both figures were significantly higher than consensus expectations.
During a recent conference call to discuss third-quarter results, management assured analysts that bookings growth has yet to slow amid Europe’s sovereign-debt crisis. The firm also reiterated its full-year guidance for 39% to 44% year-over-year growth in global travel bookings, led by a 50% to 55% rise in international bookings. For these reasons, I continue to like Priceline as a top growth stock.