Online travel agency Priceline (NSDQ:PCLN) is set to release its first quarter results this Wednesday, May 9. We expect an upbeat report on the company’s financials as it strengthens its foothold in the international markets. Other online travel agencies such as Expedia (NSDQ:EXPE) have shown robust first quarter performance driven by improving travel industry environment. Priceline is also expected to perform likewise led by strong top-line growth. Priceline’s stock has already appreciated by 57% this year which speaks volumes about investor’s confidence in the company’s performance and the future growth opportunities. The company is also investing in mobile apps to expand customer reach and achieve sustainable growth. Though the operating margins are expected to suffer amidst fierce competition, the company should be able to make for it through steady top-line growth.
International Markets Driving Growth
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The second largest online travel company in the world is exceedingly focusing on international markets primarily APAC (Asia Pacific) and Latin America. The company has already developed strong presence through its international brand portfolio including online hotel reservation service Booking.com, Asian online hotel reservation service Agoda.com and UK based car hire reservation service Rentalcars.com.
The company’s attraction towards international markets is buoyed by a 5 year CAGR of 66% in international booking revenues. These international growth rates are being driven by increasing internet adoption rates and a relatively fragmented hotel industry as compared to a market dominated by large hotel chains in the United States.
Apart from revenue growth prospects, the international markets promise higher margins and are less competitive. Given the scale, Priceline is consistently adapting its service offerings to international markets and ensuring customers have easy access by launching new mobile apps and offering content in over 41 languages. The company has already extended its product portfolio to facilitate access to 210,000 hotels worldwide.
Currently, international markets constitute 78% of the gross bookings and this trend is expected to continue. However, hotel bookings which constitute 90% of the Trefis stock price estimate for Priceline is expected to experience deceleration in y-o-y hotel room night reservation growth. This trend is expected to continue in 2012 and will negatively impact the top-line.
Eroding Operating Margins
The extremely competitive online travel industry in US with stiff competition from the likes of Expedia, Orbitz (NSDQ:OWW) and Travelocity among others has led to lower revenue margins and high promotional spending thereby squeezing operating margins. On the international front, the company will be leveraging on its brands Booking.com and Agoda to develop worldwide operations. The promotion of these brands would also involve significant operational expenses through utilization of online search, affiliate marketing, and online advertising strategies, to name a few. Though the eroding operating margins may negatively impact the bottom line, the company’s robust topline growth should be able to offset the rising operational investments.
We have a $588 Trefis price estimate for Priceline, which is about 20% below the current market price. We will be revising these estimates based on this quarter’s earnings release.