The Priceline Group Inc. (PCLN) is one of the leading online travel companies in the world, offering booking services for hotel rooms, airline tickets, rental cars, cruises, vacation packages and other things to do at customer destinations. It moreover provides financial services through Priceline Mortgage Company LLC, in which it holds a 49% share. Priceline operates a number of branded travel booking sites, such as Priceline.com, Booking.com, Agoda and rentalcars.com and works through agreements with travel providers.
The company employs two marketing strategies in the U.S.: price-disclosed reservations, a system through which the firm offers at the provider’s own prices and its identity is available at the outset, and Name Your Own Price, an opaque model which doesn’t reveal the identity of the seller until the purchase is completed, and is targeted at price-sensitive customers who are willing to compromise the brand being purchased by them. Priceline uses merchant and agency models of operation, selling directly through the company, as well as acting as an agent of the provider.
Priceline.com is generating a powerful network effect, increasing its supply offering and service inventory, and attracting more customers. Currently, Booking.com has more than 430,000 properties in its network in more than 190 countries and territories in 42 languages, with more than 200,000 properties in Europe alone.
Results for the company’s fourth quarter were above analysts’ estimations, with both revenue and order growth coming in stronger than management expectations. Online travel space is growing, and Priceline’s international growth opportunities are likely to drive upside to the shares. Nevertheless, macroeconomic headwinds and strong competition within the industry, coming from online and physical travel agencies, can always hold back the company’s performance. The Priceline Group is expected to grow significantly faster than its main peer Expedia Inc. (EXPE) during the next five years, with stronger international presence, mainly in Europe, the Asia Pacific region, and Latin America.
The popularity of online booking is increasing around the globe, and companies within this industry are focusing more and more in expanding into international markets. The rate of growth has increased every day in international bookings; in 2011, international bookings increased 78% compared to 14% growth for the domestic business.
Priceline has a sales approach which enables it to offer premium and cost-conscious services, helping to mobilize its supplier’s excess room nights. The opaque system protects supplier pricing models, while helping them mobilize inventory. Still, opaque model is becoming popular among peers, and growth rates through its adoption are likely to slow.
Analysts think Priceline’s international business might lead to growth opportunity. The acquisition of Netherlands-based accommodation reservation service Booking.com in 2005, Asia-based accommodation reservation service Agoda.com in 2007, and UK-based rental car reservation service TravelJigsaw in 2010 have further boosted the company’s penetration within international market. Through Booking.com it has recently launched its first European brand campaign called Booking.yeah, starting with the UK. During 2013, Priceline’s total online advertising expense was approximately $1.8 billion, up 41.2% year-over-year. Building brand awareness for Booking.com, Priceline.com, Agoda.com, KAYAK, and Rentalcars.com via aggressive marketing and promotion campaigns had positive results.
Incurring in new mobile hotel strategy, Priceline recently launched a new version of its Android app and said that in 2013, Priceline.com’s Android app experienced the highest year-over-year growth of all mobile platforms, more than doubling in 2013. Moreover, it has partnered with General Motors (GM) to build a custom Priceline.com app for Chevolet owners, which will enable last-minute bookers an ability to locate, compare, and book their preferred hotel in seconds with the touch of a button.
Risks and Competition
It is no news the travel industry is highly cyclical and subjected to any economic downturn which affects customers’ travel budgets and leads to a sharp downturn in business and personal travel. Travel industry also includes risks derived from global instability, such as geopolitical events, terrorism and wars, as well as the outbreak of epidemic diseases.
Moreover, the intensifying competition is likely to be hurting the firm’s margins. As most of its traffic is generated by search engines such as Google Corp. (GOOG), a change in search engine’s algorithms could drive traffic to Priceline websites lower. Google has recently entered into a deal to license hotel booking software from a Silicon Valley metasearch startup, Room 77, and in 2012 had already entered the travel space by acquiring the flight information software company ITA Software.
Competition from domestic companies such as Expedia, Inc. (EXPE), Ctrip.com International Ltd. (CTRP), Tripadvisor Inc. (TRIP) privately-held Travelocity and Orbitz Worldwide Inc. (OWW) are pressuring Priceline’s prices, and competing for the same international markets. Given the fact that macroeconomic stability is yet uncertain, and consumer’s purchasing power still not fully recovered, the company is experiencing some pressures and lacking precise forecasting. More competitive pressures and growing inventories getting disposed off at a discount, the company’s margins are likely to be affected.
Litigation has been striking online travel companies, as tax ordinances applicable to hotels don’t seem to clearly apply to online revenue. But online travel companies do not own or operate hotels, and they already collect and remit to hotels the tax on wholesale prices paid by the hotel. Still, until this situation is stabilized, these companies will have to continue paying significant amount of taxes in some states.
Analysts regard financials for last fourth-quarter as very strong, with revenues and order growth above expectations. Revenue of $1.54 billion in fourth quarter, despite being seasonally down 32.1% on a sequential basis, was up 29.4% versus year-ago quarter. The merchant business has become a smaller part of revenues, while agency business has been growing faster, up 2.0% and 39.8% respectively from the year-ago quarter. The company’s overall bookings were down 15.1% sequentially and up 38.8% year over year, over the guided range. The aggressive TV ad campaigns, the increasing of hotel inventories and the strategic alliances along with acquisitions has paid off. Moreover, its network effect builds a more attractive online platform which keeps luring customers to Priceline’s portals while enabling stronger pricing power. Therefore, the firm is well positioned for long-term growth, as it holds a stout place amid the international markets.
Nevertheless, intensifying competition from peers such as Expedia, TripAdvisor Inc. (TRIP), and other travel search engines could lead to a decline in margins. Another concern for Priceline is the fact that its website Agoda, which caters to Asian travelers, has not had much success in China, where Expedia appears to be better positioned to grow with majority-owned subsidiary Elong and a partnership with local Internet giant Tencent. Still, analysts are feeling bullish on the company, given the emerging market opportunities, the potentialities of new acquisitions and the consistent growth in gross bookings.
Disclosure: James Miller holds no position in any of the stocks mentioned.