Investors: Time to Check In to Expedia and Priceline
The market is underestimating the sustainable growth of the online travel industry, and overestimating the risks.
Competitive risks to Priceline (PCLN) and Expedia (EXPE) remain investors’ top concern, but we think the market’s angst here is excessive, and we reiterate our view that the threats are manageable. While we believe large hotel chains could see an incremental 100 million room nights through their direct booking websites over the next year or two, we estimate that only 18% of those would come at the expense of the online travel agent channel. As a result, we see just a 1-percentage-point headwind to Priceline’s booking growth (versus our annual midteens booking growth forecast through 2020); a 1.5-percentage-point headwind to Expedia (versus our annual low teens booking growth forecast through 2020); and a 0.5-percentage-point headwind to Ctrip (CTRP) (versus mid-30s annual sales growth). This negligible impact is reflected in our forecasts and has no effect on our valuations. We still see the strong competitive positions of Priceline and Expedia leading to market share gains versus current stock prices that imply market share losses in our discounted cash flow model. Further, Priceline’s and Expedia’s potent network advantages continue to support narrow economic moats.
The What, Why, and How of Direct Booking
Large hotel chains are attempting to increase direct booking on their websites through increased marketing initiatives aimed at signing up loyalty members by offering discounted room rates. Hotel operators can only offer rates below those found on online travel agent sites to “closed loop” individuals like loyalty members. Otherwise, rate parity does not allow a hotel to offer a room at a lower rate on its own website than that offered through an online travel agent, or OTA.
Dan Wasiolek does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.