Hotel Bookings Will Maintain Priceline’s Growth Momentum

Despite macro headwinds and unfavorable exchange rates, leading online travel agency (OTA) Priceline (NASDAQ:PCLN) marked a 21% and 34% increase in its 2012 revenues ($5.3 billion) and net income ($1.4 billion), respectively. Robust growth in hotel room nights, an expanding international footprint and its increasing investment in developing alternate user platforms have been the key factors driving Priceline’s global growth. The company is set to announce its Q1 2013 earnings Thursday, May 9, and we believe the above factors will continue to fuel its top line growth.

Though the higher operating expenses might suppress margins, we feel that the continued investment in building its brand will help drive Priceline’s future growth in domestic as well as international markets. While we maintain a positive outlook for Priceline’s long term potential, we think the current growth rate is difficult to sustain in the long run and estimate this to slow over our review period.

See our complete analysis for Priceline

Stronger Hotel Inventory To Support Growth

Contributing over 85% to Priceline’s valuation, we estimate hotel bookings to be the most important division in Priceline’s portfolio. With over 20% revenue margins, hotel booking is also the most profitable division compared to airlines (~2%) and car rentals & cruises (~9%). We consider this business to be of strategic importance for Priceline’s future, and we believe the company has fared well so far to leverage growth in the domestic as well as international markets.

Priceline’s growth in hotel room nights bookings accelerated to 38% in Q4 2012, compared to 36% in Q3 2012. The company continues to build on its worldwide hotel supply platform and currently has over 275,000 hotels and other accommodations in 180 countries and territories, up 41% annually. Apart from an increase in the hotel supply base, we feel the greater penetration of existing hotels is also equally important to drive momentum in unit growth.

Priceline Plans To Pare Expedia’s Lead In The U.S.

Due to its expanding international footprint, Priceline overtook Expedia (NASDAQ:EXPE) as the world’s largest OTA by sales in 2010. However, with a 43% share of gross bookings, Expedia remains the most popular OTA among American users. In comparison, Priceline’s share in U.S. travel bookings was just 11% in 2012, according to research firm PhoCusWright. ^[1] Despite slowing growth, the U.S. online travel market remains the biggest market in terms of sales and will continue to be so for years to come.

In November 2012, Priceline announced its acquisition of leading meta-search engine Kayak (NASDAQ:KYAK) for $1.8 billion. Though the acquisition is pending antitrust review by U.K. regulators, Priceline expects to close the deal by the second half of 2013. Growing at a CAGR of 47%, Kayak’s top line has witnessed robust growth between 2007-2012. The company currently receives about 80% of its revenue from the U.S. and has over 50% share of the U.S. meta-search market. ^[2] We believe that by attracting more traffic to Priceline’s website, Kayak’s acquisition can increase booking transactions for the company.

Last year, Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S. With an inventory of over 280,000 hotels and 18 million reviews in 178 countries, Booking.com has been the primary product behind Priceline’s success in the European market. We believe that by increasing Booking.com’s presence in the U.S. market, the offline campaign can help expand Priceline’s footprint in the market.

Increasing Investment In Mobile To Accelerate Future Growth

With an increasing number of people using mobile devices to go online, the mobile platform offers immense growth potential for travel services. To leverage the same, Priceline has been focusing on developing new applications and upgrades to the mobile web. Owing to its increasing investment in building a strong mobile platform, Priceline owned Booking.com saw the total transaction value of mobile hotel bookings grow from $1 billion in 2011 to over $3 billion in 2012. ^[3]

The favorable mobile trends gives Priceline the opportunity to offer new products to its customers. Last year, it launched “Express Deals” and a number of other services offering thousands of great deals on hotels for the mobile users. As evident from the robust increase in hotel bookings over Booking.com, the transactional business on Priceline’s mobile services is growing rapidly. We expect Priceline’s focus on continuous innovation to further fuel the growth momentum.

Despite drawbacks such as high investment levels and lower conversion rates, we believe that it is important for OTAs to keep up with innovation in the rapidly growing mobile space, or else they face the risk of losing out a growing user base of online travel bookings via mobile devices.

Intense Competition Could Restrict Growth In Margins

The online travel services is a highly competitive niche segment with stiff competition among OTAs. In an effort to gain competitive advantage, travel companies have expanded their advertising budgets and are creating new promotions and consumer value features such as eliminating processing fees, waiving cancellation and change fees, etc.

Priceline launched its first offline advertising campaign to build the Booking.com brand in the U.S. and continues to spend aggressively to build its international operations. Though the high operating expenses put pressure on operating leverage, the company intends to continue investing in product development and customer acquisition to drive future growth. Since it currently has an insignificant market share in some international regions which offer tremendous opportunities, we expect Priceline to continue investing in building its global image.

Though we believe that high expenditure incurred will help drive future growth, we estimate Priceline’s EBITDA margin to remain more or less around the present level for the rest of our forecast period.

We will update our price estimate of $633 for Priceline after the Q1 2013 earnings release.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Priceline, Travelocity take steps to increase share, Travel Weekly, February 5, 2013 [↩]
2. Who is so far feeling the heat from Google Flight Search? No major surprises here, tnooz,  February 17, 2012 [↩]
3. Booking.com Mobile Bookings Triple, Priceline Press Release, April 11, 2013 [↩]