According to a recent study by comScore, last year the U.S. online travel business became a $100 billion industry. In 2012, the spending on online travel increased by about 9% and reached approximately $103 billion with two-thirds of the spending dedicated to air travel. Expedia Inc. (EXPE) was the top OTA performer followed by Priceline.com Incorporated (PCLN) and Orbitz Worldwide Inc. (OWW). Below is a chart of the category page views and a discussion about the future.
Online Travel Agents
Percentage of Category Page Views (~)
Orbitz Worldwide Inc.
Orbitz Worldwide Inc.
Recently, Orbitz's stock has seen an upside that is generally considered rare for any listed company. The stock is up by about 115% year-to-date. The stock price saw an upside after the declaration of fourth quarter results. Going forward, I feel that last year's positive movement in the hotel booking segment of the company should continue in the future as well. The global room night business grew by 7% in the last quarter and forward bookings showed acceleration as January room night bookings were up 14%. Orbitz.com in particular experienced a sequential improvement in room-night growth and also reflected upward pacing for the first quarter.
In addition to this, the deal with American Express Company (AXP) that was rolled out in the third quarter of 2012 should provide incremental hotel revenue in 2013. The company entered into a consumer travel network partnership with American Express to provide its customers with services to power vacation packages. It is expected to gain approximately 70% increment in dollar revenue from this segment. Moreover, mobile continues to be a significant contributor in driving the sales. It was responsible for about 25% of the total hotel bookings in the last quarter and should increase in the coming year with the increasing use of portable devices.
The sales in the hotel segment of the company should be a key driving factor for the stock in the future. But I see some headwinds in its largest segment, i.e. the airline booking segment, as its capacity is continuously reducing along with the modestly growing margins.
In the last quarter, the company reported its room-night growth rate of 33%, whereas the international room-night growth rate was 49%. The international hotel volume growth accelerated from mid-teens in the second quarter of 2012 to around 40% in the last one. This was mainly because of improvement in the conversion rate, increased marketing efforts, and share gains from traditional agencies.
For 2013, the company acquired the Germany based travel website Trivago to maintain the same growth rate. Expedia paid $564 million cash and signed an agreement to issue 875,200 shares over the next five years for the acquisition. Trivago is a metasearch travel website that shows search results from more than 640,000 hotels from nearly 160 sites and also offers over 34 million integrated hotel reviews. Trivago is expected to report about $130 million in revenue for 2012, after four consecutive years of doubling its revenue. This acquisition should provide some accretion to Expedia's stock and help it in its long-term growth in the segments - hotels and international bookings.
Additionally, the company has signed about 20,000 hotels to its Expedia Traveler Preference (ETP) Program. Under the program, customers have the option to choose to pay Expedia up-front at the time of hotel booking or pay the hotel directly when they reach there. There is no doubt that this program will bring a substantial number of additional customers to the company.
The domestic market of Priceline was modest in 2012, but the weak economy in Europe, which accounts for over 60% of Priceline's business posed some headwinds. However, growth in sales and key metrics accelerated in the last-quarter and further increment is expected in 2013. International gross bookings grew by about 43% year-over-year in the fourth-quarter as compared to 41% in the previous one. The company is well positioned to benefit from the transition of offline to online travel bookings in countries, where online penetration is lower than the US. It will also take advantage of the difficulty faced by hotels in those markets to directly book rooms in a high-tech environment.
With the growing international market in mind, the company acquired KAYAK Software Corporation (KYAK) for $1.8 billion. This company assists customers to compare charges and prices for booking flights, hotels, cars, packages etc. The major reason for acquiring KAYAK is to hedge the company against the potential domination of Google in travel searches and an increase in advertising availability and price. Additionally, KAYAK has a higher gross profit ratio than Priceline, which should provide additional upside to the company's profitability. Although in 2013, the company expects the contribution from the acquisition to remain at a minimum, but in the long run it should gain traction.
Priceline reported that as on Feb. 2013 the total number of hotel suppliers for Priceline is about 295,000. The company is in a good position to have a noticeable presence in the international market, which should be the future growth driver for the company.
All three stocks are capable of capturing a significant stake in the growing online travel industry. Expedia's ETP program should help the company increase its customer base and its acquisition of Trivago seems promising. Speaking of acquisitions, Priceline's acquisition of KAYAK should help increase its profitability in the long-term.
As far as Orbitz is concerned, although it is a relatively smaller competitor of the above two, it still has a lot to offer. Its agreement with American Express and improving room night bookings should help boost the stock price in the future. I am optimistic about all of them and hence suggest that the current prices are at a good entry point.