Measured by gross bookings, Priceline (NASDAQ:PCLN) is the second largest online travel company in the world after Expedia (NASDAQ:EXPE). While the latter posted $29 billion in annual gross bookings, Priceline significantly closed the gap by witnessing a 59% y-o-y increase to $22 billion in gross bookings in 2011. However, for the same period, while Expedia’s revenue amounted to $3.4 billion, Priceline’s annual revenues stood at $4.35 billion on account of higher gross margins.
With its robust growth rate, Priceline has managed to close Expedia’s lead over it in terms of the OTA market share in the U.S. While Expedia accounts for 14.2% of the U.S. OTA market, Priceline has increased its market share to 11.6%. 
Over the last few years, both the companies have significantly expanded their operations outside the U.S. Post the acquisition of Booking.com and Agoda.com, Priceline has been steadily increasing its share in international markets. Its international business contributed approximately 78% to its gross bookings (up from 55% in 2007) and 88% to its operating income in 2011. As Priceline remains focused on further expanding its operations in international markets, we expect its growth rate to continue in the future, albeit at a declining rate for the rest of our forecast period.
Saturating US Online Travel Market
As per the latest report by PhoCus Wright, after years of continuous growth, the online travel sales in the U.S. are lagging behind the overall growth rate in the travel market. PhoCus Wright estimates online travel booking in the U.S. to currently stand at around 39% and forecasts the same to only marginally increase to 40% by 2013. 
The report also claims that the country is witnessing an increasing shift toward direct bookings via the suppliers’ websites (especially airlines). The supplier channel secured a 62% share of the leisure/unmanaged online travel market compared to 38% accounted for by OTAs in 2011. Thus, almost all the major U.S.-based OTAs, including Priceline and Expedia, have branched out to other geographies. 
Europe & Asia-Pacific Offer Better Growth Opportunities For OTAs
While the U.S. has over 78% of Internet users, the proportion of Europe’s population online is close to 61%, with Internet penetration in Asia being even lower at 26%. Though the difference is far less when it comes to online travel penetration – U.S. (39%), Europe (38%) & Asia-Pacific (23%) – the same is expected to grow at a faster pace in Europe and Asia-Pacific compared to the U.S.
The size of the travel market opportunity in Europe is substantially larger than that in the U.S. while that in the Asia-Pacific region is almost in-line with the U.S. Though historically Internet and e-commerce adoption rate in the U.S. have been much higher than the rest of the world, the narrowing gap is expected to further narrow in the future. As per Priceline, international online travel growth rates have substantially exceeded and are expected to continue to exceed the U.S. growth rates.
Thus, we can expect to see a growing percentage contribution from Europe and Asia-Pacific to the global gross online travel bookings in coming years. The combined contribution to gross online bookings from these two geographies in 2011 is estimated to be around 56%. 
Fragmented Hotel Market In Europe & Asia
Expansion into hotels markets in Asia and Eastern Europe present a tremendous growth opportunity for U.S.-based online travel services providers. The hotels markets in Europe and Asia are much more fragmented with smaller, independent lodgings compared to the U.S., which is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites while online travel agencies such as Priceline are more appealing to small, independent hotels outside the U.S.
Key European markets currently represent around 60% of Priceline’s total booked room nights and, with Agoda.com and Booking.com, the company remains focused on increasing its presence in the Asia-Pacific region as well. We estimate that hotel bookings contribute more than 90% to Priceline’s valuation. Not only does this segment contribute over 95% to the company’s revenue but, with over 20% revenue margins, it is also the most profitable.
Our price estimate of $568 for Priceline which is below the current market price.Notes:
- Priceline claws back ground from Expedia – Top US travel sites, July 2012, Tnooz, August 6, 2012 [↩]
- PhoCus Wright: US online travel market share stalling and suppliers rule, Tnooz, November 10 2011 [↩] [↩]
- New Media Trend Watch – Regional Overview – Europe & Asia-Pacific [↩]