Improving Hotel Occupancy Levels Spell Upside for Priceline’s Stock
Priceline.com (NASDAQ:PCLN) mainly competes with Expedia (NASDAQ:EXPE), Travelocity and Orbitz (NYSE:OWW) in online travel services like bookings for air tickets, hotel stays and car rentals. Priceline recently released its Q4 2010 results. Two highlights of the results are a 44.3% year over year (YOY) increase in gross travel bookings, and a 68% rise in international revenues compared to same quarter last year. [1] Rising international revenue reiterates our view that Priceline (through its acquisitions like Booking.com and Agoda) should be able to leverage its foothold in European and Asian markets.
We currently have a Trefis price estimate of $452 for Priceline’s stock, ahead of the current market price of $426.
Hotel revenues and occupancy levels are improving worldwide after the economic slump. Although this is a positive, the rising number of online travel sites and the fact that hotel chains & airlines are promoting their own websites for bookings will lead to fierce competition in the online travel market. This could have a negative impact on Priceline’s market share. We anticipate Priceline’s share of occupied hotel rooms will rise to 3% by the end of Trefis forecast period vs. Trefis members’ expectation of 3.5%. The member estimates imply a potential upside of 14% to PCLN stock.
Improving Hotel Occupancy Levels a Positive…
During the economic crisis, airlines, hotels and travel agents were in a tough spot as corporates were cutting down business travel and retail customers were postponing or canceling vacations. The occupancy rates of hotel rooms for the first half of 2009 were in negative for most cities globally. [2] This situation has slowly started recovering beginning 2010 with improving average revenue per available hotel room and occupancy levels. According to the Economist, hotel revenues in Shanghai have increased 60% with an occupancy rate of 36% from Jan to Sept 2010 compared to same period in 2009. [3] The report further states that although not much has changed in the room rates, the occupancy levels are rising. This indicates that hotel bookings and travel have resumed – a positive sign for online travel agents as well.
… But Growing Competition a Concern
Online travel agents (OTAs) like Priceline, Expedia and Travelocity are attracting customers by reducing booking rates, eliminating cancellation fee, or having specials on vacation packages. The stiff competition among OTAs indicates that the online travel market is becoming tighter. Apart from other OTAs, Priceline also competes with airlines and hotel chains that are focusing on improving their own websites so that they don’t have to share revenues with travel agents. Such a scenario puts tremendous pressure on Priceline’s market share.
But is there an alternate world where travel agents and hotel chains co-exist?
We recently wrote how airlines could benefit if Priceline were to sponsor hotel bookings on their websites. By doing so, airlines would be able to offer more comprehensive options and attract more bookings, while Priceline gets a wider audience. (See: How About a New Business Model for Priceline)
Trefis Community Forecast
Trefis members forecast Priceline’s market share of occupied hotel rooms will increase from 2.4% in 2011 to 3.5% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from 2.2% to 3% during the same period. The member estimates imply an upside of 14% to the Trefis price estimate for Priceline’s stock.
Our complete analysis for Priceline’s stock is here.
Notes:- Priceline Q4 EPS Easily Beat; Revs Jump 35%, Miss Estimate, TheStreetInsider.com, Feb 23, 2011 [↩]
- Hotel Occupancy Rates, Economist, Sept 3, 2009 [↩]
- Hotels Data, Economist, Oct 22, 2010 [↩]