Stocks for Cashing In on the Online Travel Boom
“Travel agent” hasn’t yet joined the list of jobs that have faded into memory, such as “carriage operator” and “gas station attendant.” The stunning success of the companies that offer flights, hotel reservations and rental cars suggest that day may not be far off, though.
Despite lofty gains in some of these stocks, it’s not too late to cash in on this relatively young sector’s growth. We’re especially keen on Priceline Group (PCLN), owner of Priceline.com, and Expedia (EXPE). Two other companies — Orbitz Worldwide (OWW) and TripAdvisor (TRIP) — should also benefit from the online travel trend, but we urge more caution with their shares.
Online travel bookings in the U.S. grew by 37% from 2009 to 2013, according to research firm Euromonitor International, but the majority of the world’s travel bookings are still done offline. Expedia and Priceline, despite being the world’s two biggest online travel agencies, combine for less than 10% of global bookings, says Morningstar analyst Adam Fleck.
Priceline raised eyebrows in September 2013 when the price of its stock crossed the $1,000 mark. Proving that a high price alone doesn’t necessarily make a stock expensive, Priceline shares have since gained 26%, to $1,260.77, on the strength of continued international growth (share prices are as of the August 27 close).
Priceline is best known in the U.S. for its “Name Your Own Price” bidding service and its commercials with Star Trek’s original Captain Kirk, William Shatner. The key to Priceline’s success, however, was the astute purchase in 2005 of Bookings B.V., whose Booking.com has become Europe’s leading hotel-reservation site. Fleck says Booking.com has more than 430,000 global properties in its network, including 200,000 in Europe.
As more hotels list rooms, more consumers will seek out Booking.com, making it appealing to even more hotels. This is a powerful “network effect” that grows stronger over time, Fleck wrote recently. He says Priceline also has a strong presence in several emerging nations.
Analyst Mark Mahaney, of RBC Capital Markets, calls Priceline “one of the best growth stocks in the Internet sector.” He believes Priceline is gaining market share in “practically every market” it operates in. He considers the 29% growth in Priceline’s hotel room bookings in the second quarter particularly impressive because its hotel business is twice the size of Expedia’s. Mahaney says “the large numbers law” will inevitably slow Priceline’s growth, but “it hasn’t really yet.” (Signaling a desire to grow in new ways, Priceline bought restaurant-reservation service OpenTable for more than $2 billion in July.) Mahaney rates the stock a buy and expects it to reach $1,500 in a year, which is 22 times his forecast for the company’s 2015 earnings.
Expedia is the dominant online player in the U.S. The owner of Hotels.com and Hotwire, it produces 3.5 times the U.S. sales that Priceline does. Analysts had high expectations for Expedia’s second-quarter results, and they smashed through them. Expedia reported a 24% increase in revenue from the same period in 2013, a 33% gain in net income and widening profit margins.