With the recent acquisition of travel search site Kayak, Priceline (NASDAQ: PCLN) seems set to cement its ongoing dominance of the online travel agency market sector. In the wake of the acquisition, many analysts have upgraded Priceline stock to a buy. Should you follow their recommendations and add Priceline to your portfolio?
Kayak and the US Travel Market
In its 2012 annual report, Priceline confirmed its market dominance by reporting revenues of $5.26 billion, which was higher than the combined revenues of the other nine companies in its industry group, which include Expedia (NASDAQ: EXPE) and Orbitz (NYSE: OWW). Despite this, however, Priceline ironically lags behind competitor Expedia in the US market, where it has a market share of 43% compared with Priceline's 11%. Kayak is expected to help Priceline bridge this gap by improving its competitiveness in a number of ways.
Kayak is a meta-search engine that collates results from several search engines. This unique service has helped generate vigorous growth for the company, which grew at an annual compound growth rate of 47% from 2007 to 2012. For Priceline, the value of Kayak is that it allows users to more easily compare quotes for flights, hotel rentals and other travel services and packages by providing them with a broader range of results. Kayak would help drive more traffic to its various sites. In addition, Kayak would provide Priceline with an extra revenue stream in the form of paid search and advertising. Currently, Priceline does not earn much from online advertising, but this is expected to change with its acquisition of Kayak, since the meta-search engine earns some 50% of its revenues from advertising.
Kayak is also seen to help increase Priceline's mobile user base. Mobile represents an important source of potential revenues since an increasing number of travelers perform online transactions and get their travel information through mobile devices such as tablets and smartphones rather than from desktop computers. Kayak reported that its mobile app was downloaded over three million times in the third quarter of 2012, nearly double the number of downloads reported in the same quarter last year.
Growth from Overseas Markets
Even if it fails to get more market share in the US, there is still plenty of room for Priceline to grow in the European and Asia-Pacific regions, since its focus has traditionally been in overseas markets. Its acquisition of Agoda in 2007 has helped increase its profile in the Asia-Pacific travel market, since the site focuses on hotels and travel services in the region. According to research company PhoCusWright, the Asia-Pacific market will remain the fastest growing travel region in the world in 2013, driven by surging consumer travel demand in China that is seen to make it the world's largest travel market, overtaking Japan.
But it is in the European market where Priceline enjoys the greatest success. As part of its efforts to expand its operations in the region, Priceline acquired Booking.com in 2005. Europe is seen to enjoy some of the biggest growth in global online travel sales, with sales seen to increase from $141 billion in 2012 to a projected $176 billion by 2016. The share of online sales to total travel sales in Europe is also seen to increase from 45% in 2012 to 50% by 2016. This growth provides a great opportunity for Priceline to further increase its market share in the region, particularly since Booking.com has only 6% of the European hotel market, while 60% of total room nights booked by Priceline come from European customers. In addition, after a period of economic uncertainty in the region fueled by the debt crisis, the economy is seen to have stabilized and more Europeans may be making travel plans again.
Its strong overseas performance helped boost its first quarter 2013 earnings report past analysts' forecasts. Revenues increased by 26% during the quarter to $1.3 billion, just past forecasts of $1.28 billion. However, in its guidance for the second quarter, Priceline said that it anticipates slower revenue growth of 15% to 22% due to economic uncertainty in some overseas markets as well as more intense competition in the online travel agency sector. Competitor Expedia announced in December 2012 that it was acquiring Trivago, one of the leading meta-search engines for European hotel bookings, in an attempt to increase its market share in the region.
The Bottom Line
There's really no reason not to add Priceline stock to your portfolio, since the company has demonstrated solid growth prospects. Its only weakness is that demand for its services is dependent on external economic conditions, which makes it vulnerable to market changes. In addition, it has to face off challenges from competitors who also want to score market share in overseas markets where Priceline is strong. But its market dominance should not only allow it to withstand competition but also survive adverse market conditions. In addition, it does not pay any dividends, allowing it to retain earnings to finance further expansion. Its share prices are also up by 25% over the past year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.