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Matthew Indyke and Brian Zen
Matthew Indyke and Brian Zen
Articles (23)  | Author's Website |

Online Travel Industry Getting Squeezed: Kayak vs. Priceline

August 16, 2012 | About:

Does the plunging stock price of decade-old online travel companies like Priceline (NASDAQ:PCLN) suggest their model is outdated and losing value? Is a more modern online travel company like Kayak (KYAK) a hot newly listed stock for investors? Investors are wondering whether to keep their money in a stock like Priceline that is sinking or risk putting it in a newer company like Kayak, whose future as a public company is uncertain, at best. The bottom line: Is investing in an online travel company, old or new, a risk worth taking or is the industry too unpredictable to be consider as a safe investment?

What Priceline’s Decline Means?

Priceline, at one time, was one of your greatest investments if you put your money in it between 2008 and 2010. It was the number one travel website that users visited. That is, until newer companies broke into the industry and found a better way of doing things. Once the new companies started winning over consumers, Priceline began to lose its flair.

Priceline’s stock was as low as $51.95 in October 2008 and it kept rising higher and higher until reaching its peak at $774.96 this year. Eventually, investors decided it was the right time to sell and down went the stock to $566. While this is still a high price for Priceline, the rate at which the price is dropping suggests its high-riding days in the stock market could be ending. Although Priceline sits well-above its 52-week low of $411.26, if it continues to drop, it may very well sink below that number as well. Despite the recent plunge in its share price, Priceline is not a value stock; at 24 times earnings and 6 times revenue, it is a growth stock and will continue to be for a while.

Priceline’s future could be in trouble for the following reasons:

  • Intensified competition in online travel services, particularly from newer start-ups, is causing Priceline to decrease its prices, leading to lower revenue margins and squeezing operating margins. Online travel competitors Orbitz (OWW), Expedia (NASDAQ:EXPE), and TripAdvisor (NASDAQ:TRIP) also reported lower earnings for the second quarter. Although their losses were less severe, the earnings reports suggested that Priceline’s existing problems might be across the industry. They all share something in common that suggests the tide could be shifting in online travel: Priceline, Orbitz, Expedia, and TripAdvisor all started in the late-90’s to early-2000’s when the online travel industry was just getting started.
  • Priceline has been increasing its promotional spending in international markets, an area of growing economic uncertainty, to lure more customers to its websites. As the online travel giant generates a significant portion of its revenues from Europe, the slowness in the European economy appears to be hurting growth prospects of the company in the near term. Priceline is looking at a decelerating growth rate in the next few quarters and this trend is not likely to change until Europe can get back on track.
  • The low entry cost makes the industry vulnerable to potential threats from new kinds of online travel sites, like Kayak, an emerging company in online travel whose website was specifically designed for bargain hunting in a changing economic environment.
Kayak’s Future Outlook as a Public Company

Kayak, an online travel website that started in 2004, created a layout and model that made it more attractive for users. Because its website is more geared for price comparison, Kayak has been threatening the existence of older companies since becoming popular with users in the late 2000’s. And the founders of Kayak happen to be the cofounders of Expedia, Orbitz, and Travelocity. Their mission was to take a different approach to online travel by enabling users to compare prices on hundreds of travel sites at once (Expedia, Orbitz, and Travelocity included), in one fast and intuitive display to find the best deal. Kayak, nowadays, has become a provider of online travel offers and services from hundreds of other travel websites via its website.

Unlike online travel agencies that started earlier, Kayak does not provide online bookings directly but gives consumers a one-stop research solution to best fares along with other value-added services like flight status updates and pricing alerts. By providing an easy comparison of fares across various websites, Kayak makes the travel search easier for its users. People who use Kayak find they never need to leave the site to check if they are getting the best deal on their bookings. All the information they need is right there in front of them.

Since entering the public market at an IPO price of $26, Kayak has seen its price rise as high as $35 and has yet to fall below its IPO price. Still, there are rumblings that Kayak’s stock is overvalued and that investors are being advised to avoid it. Shares have dropped to new lows, down 10% to $26.42, as the underwriting banks first published their views on the online-travel company. Three gave the stock a hold, saying shares are already on the mark, and two gave it a buy. Here are three reasons to be cautious on Kayak and as you see, they all primarily relate to its future revenue stream:

  • Kayak’s trailing P/E ratio of 40, a price-to-sales ratio of 5.02 and a price-to-book ratio of 4.35 suggest high expectations for future growth but the evidence suggesting its ability to grow its revenues isn’t there.
  • Kayak earns its revenues primarily through advertising and referral fees earned from its suppliers without charging any fees from its customers. Overall, the company earns its highest revenues from advertising compared to referral fees per query. When advertising makes up most of your revenues, you are living on the edge because when one advertiser drops its sponsorship, the company can fall like a rock. Facebook recently encountered this issue when GM dropped its advertising partnership.
  • Due to the discretionary nature of leisure travel, other sources of revenue for online travel service providers depend entirely on macroeconomic conditions such as employment levels, inflation rates, fuel prices, and foreign exchange rates. Some of the best-known online travel companies say growing economic uncertainty is causing fewer people to travel, especially in Europe. Consumer confidence has been improving, but it's still shaky and at relatively low absolute levels. Online travel companies are also being hurt by airlines’ continued effort to keep costs low, as airlines are cutting flights to save money, which means fewer seats for travel bookers to sell. All in all, the combination of economic uncertainty, competition and investment spending suggest that now is not the right time to start significant positions in online travel industry.

Disclosure: The authors have no position in the stocks mentioned.

About the author:

Matthew Indyke and Brian Zen
SUPERINVESTOR.net is an investment research co-op for next-generation super investors, analysts, and advisors.

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