The Scenario That Can Significantly Bolster Priceline’s Valuation

PCLN: Priceline Group logo
PCLN
Priceline Group

Priceline Group (NASDAQ:PCLN) recently released its Q2 2015 earnings. On the aftermath of yet another brilliant performance by the company, we try to explore some of its expansion strategies in the accommodation segment. Priceline is focusing on the vacation rental segment, as well as increasing its global footprints in emerging nations like China and Latin America (LATAM). We discuss Priceline’s probable reasonings behind these strategies, and how their successful implementation can aid the company in achieving an even higher market valuation in the future.

Our price estimate of $1,289 for Priceline’s stock is almost in line with the current market price.

See Our Complete Analysis for Priceline Here

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Priceline’s Wider Range Of Offerings And Geographic Expansions Can Increase Its Market Share In The Accommodation Segment (~20% Upside)

1. Priceline’s Major Expansion In The Vacation Rental Segment

In its Q2 2015 earnings call, Priceline’s management discussed at length why vacation rental is an important business proposition for Priceline. In June 2015, Kayak–Priceline’s travel search engine, entered into an agreement with HomeAway, the world’s largest vacation rental marketplace listing over 1 million properties in around 200 countries. The agreement allows Kayak to list HomeAway’s vacation rental properties on its website. [1]

Even though Priceline’s rival Expedia had previously forged a partnership with HomeAway, the company doesn’t give any special importance to HomeAway’s vacation rental listings which are listed on the common Expedia.com web page along with its other listings. In contrast, Priceline has decided to make a separate tab for vacation rentals on the Kayak website so that their user accessibility and hence, sales’ prospects are significantly enhanced. [2]

  • Importance Of The Vacation Rental Segment In Today’s Travel Market

According to Priceline’s management, the market for vacation rental is slowly gaining importance in the minds of travelers. A lot of people with large families might prefer renting an accommodation near the sea, for their beach holiday, instead of staying in hotels. Vacation rentals are also economical for travelers who wish to stay for a longer period of time in a certain place. Vacation rentals allow facilities like allowing travelers to cook their own meals, instead of spending money on eating outside every day. Additionally, a customer making several trips, might want to opt for a vacation rental on a particular trip, instead of a hotel. Priceline wants to let those users shop through its website rather than migrating to a rival’s website to fulfill the need.

Apart from hotels, Priceline currently lists B&Bs, tree houses, and even igloos on its Booking.com platform. Hence, vacation rentals are of crucial importance to Priceline for achieving its goal in transforming from the world’s largest online hotel supplier to  the world’s largest accommodation provider. 

  • A Rough Estimation Of The Market Size

According to a PhoCusWright report, the market for vacation rentals in the U.S. stood at $23 billion in 2012. The share of online sales in vacation rentals doubled from 12% in 2007 to 24% in 2012, and this is estimated to have increased by 30% in 2014. [3] Hence, the market for vacation rental is significantly growing with time.

  • Priceline’s Current Sales In The Segment

Over the last 12 months, Priceline’s vacation rental nights sales amounted to approximately 50 million, which was booked through Booking.com and Villas.com. This reflected a 39% year-over-year growth. [4] Hence, the increase in demand fueled the company to increase the supply for vacation rentals, as well.

2. Priceline Expands Its Footprints In China And Latin America

  • China

Priceline’s partnership with Chinese OTA leader, Ctrip, dates back to 2012. The partnership was further bolstered in mid-2014 when Priceline invested $500 million in the company. The main purpose of this enhanced partnership was the cross promotion of each other’s hotel inventories.

Priceline earns approximately 95% of its revenue from hotel booking and it is the primary non-China hotel partner for Ctrip. Priceline’s outbound business experienced substantial growth after Agoda and booking.com were featured on Ctrip. The Chinese outbound market is one of the largest in the world, where traffic surpassed100 million in the first 11 months of 2014. [5]. This translates to an over 100% growth from 2009. The number is expected to cross 160 million by 2018. [6]

According to the research firm iReasearch, Chinese online travel market transactions  amounted to $36 billion in 2013, displaying a 29% year-on-year growth. [7] The research firm forecasts China’s online travel gross merchandise value to total $75 billion by 2017. [8]

With a 56% share in revenues, Ctrip is the market leader in the Chinese online travel market (followed by elong and TongCheng with a revenue share of 9.7% and 6.3% respectively) [9]. Recently, after acquiring a 40% stake in eLong, Ctrip’s powerful position in China has increased even further.

In May 2015, Priceline invested an additional $250 million in Ctrip, shortly after Expedia’s eLong divestiture and forging a strategic alliance with Ctrip. Once the deal is completed, Priceline will own up to a 15% stake in the biggest Chinese OTA. [10]

  • Latin America

In July 2015, Priceline acquired a minority stake in Brazil’s top OTA, Hotel Urbano. As a result, Priceline’s Booking.com will be the exclusive accommodation provider for Hotel Urbano’s traveler bookings outside of Latin America (LATAM). Priceline had previously expanded its presence in Argentina and now it is focusing on Brazil. Hence, there is a high brand awareness for Priceline in the LATAM region. ((Priceline’s Q2 2015 Earnings Call Transcript, Seeking Alpha, August 5, 2015))

Like China, LATAM is also one of the fastest growing markets in the online travel sales domain, with an average of 15% year-on-year growth rate. According to PhoCusWright, the LATAM travel market size will reach almost $100 billion by 2016. [11]

Given its focus on increasing the array of accommodation offerings and its foray into the international markets, we can assume that a greater share of the hotel pie would be captured by the OTA leader, if its alliances turn out to be successful. Under this scenario, Priceline’s market share for occupied hotel rooms might increase substantially. We currently expect Priceline’s market share to increase from around 6% in 2014 to over 10% by the end of our forecast period. However, if Priceline’s market share increases to around 13% by the end of our forecast period, then there can be over 20% upside to our price estimates for Priceline.

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Notes:
  1. Kayak Partners With Booking.com Competitor HomeAway on Vacation Rentals, Skift, June 1, 2015 []
  2. Analysis: What Does the Kayak-HomeAway Deal Really Mean?, Skift, June 8, 2015 []
  3. Vacation Rentals in the U.S. Are Now a $23 Billion Industry, Skift, October 25, 2013 []
  4. Priceline’s Q2 2015 Earnings Call Transcript, Seeking Alpha, August 5, 2015 []
  5. The Top Chinese Travel Trends to Watch for in 2015, Skift, December 2014 []
  6. The State of Chinese Outbound Travel in 2014, Skift, September 2014 []
  7. China Online Travel Market Outlook 2014, iResearch, Feb 2014 []
  8. Enter the dragon: China online travel soars, $75 billion market by 2017, tnooz, Mar 2014 []
  9. China Online Travel GMV Grows to 70 Bn Yuan, iReasearch Views, November 2014 []
  10. The Priceline Group Announces Additional Investment in Ctrip, Priceline Press Release, May 26, 2015 []
  11. Online travel in Latin America: A big, complicated opportunity, tnooz, December 11, 2014 []