Priceline’s Bet on Hotel Business Should Keep Paying Off
Priceline’s (NASDAQ:PCLN) stock gained around 85% last year raising some concerns on whether its business could keep up with its stock price. The company’s recent earnings announcement put some of these concerns aside as Priceline grew bookings by almost 47% from $9.3 billion in 2009 to over $13.6 billion in 2010 due largely to international bookings which grew at a staggering 67% year-on-year, compared to 14% growth in domestic (U.S.) bookings. While leading online industry players such as Expedia (NASDAQ:EXPE), Travelocity, Orbitz (NASDAQ:OWW) struggle with declining commissions on air ticket bookings in an increasingly competitive U.S. travel market, Priceline focuses on hotel bookings segment outside U.S, which is paying off handsomely.
Expedia is the leading online travel agency in terms of booking volumes while Priceline, which comes a close second in overall travel services, leads the world in hotel bookings after having acquired Booking.com (for European market) and Agoda.com (for South Asian market). We currently have a $479 Trefis price estimate of Priceline’s stock, which is around 5% ahead of the current market price.
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Priceline’s average revenue margin (revenue as a percentage of total size of booking) fell slightly from around 25.1% to 22.6% over the same period. Nevertheless, Priceline still posted impressive revenue growth of 32% from $2.3 billion in 2009 to $3 billion in 2010.
Focus on Hotel Bookings
Priceline’s game plan for 2010 has broadly been gaining share of hotel bookings outside U.S. at lower revenue margins (Priceline’s revenue as a percentage of the size of bookings). The number of hotel nights booked through Priceline’s websites grew at a staggering 52% from near 61 million in 2009 to 93 million in 2010 raising Priceline’s share of the global hotel bookings from 1.42% to 2.13% in the process. Given that hotel bookings command a significantly higher revenue margin at over 25% compared to around 3% for air ticket bookings, gaining share in hotel bookings is particularly profitable for any travel agency.
You can see in the modifiable chart above our forecast for global hotel market share.
Improving Operating Margins
Priceline improved its EBITDA margin from 23.6% in 2009 to 29.2% in 2010. Much of this increase is on account of explosive growth in bookings thereby diluting fixed operating expenses over higher revenues.
Priceline’s rental car days grew by over 43% in 2010, primarily due to the inclusion of car rental reservations sold by TravelJigsaw, which it acquired in May 2010. Priceline’s robust growth in international bookings was primarily due to hotel reservations in Europe over Booking.com and in Asia over Agoda.com, which along with US hotel bookings over Priceline.com make up over 91% of our $479 Trefis price estimate of Priceline’s stock.
What Could Mitigate This Growth?
2011 poses to be yet another challenging year with the U.S. recovering slowly from the economic downturn over 2007-09. While emerging economies in Asia and Latin America are exhibiting good growth, they do expose Priceline’s earnings to much foreign exchange exposure. The ongoing political unrest in the Middle East, the sovereign debt crisis in European economies of Portugal, Ireland, Spain and Greece, and rising oil prices reaching around $115 per barrel (Brent) pose a threat to international tourism.