With Priceline's (
) stock gaining a staggering 1800% ($23 Jan 2006 to $440 in Jan
2011) since the beginning of 2006, it comes as no surprise that
Priceline has been recognized as the single best-performing stock
in the S&P 500 over the past five years. Priceline is the
second largest player in terms of booking volumes after
) and competes with other leading online travel agencies such as
Travelocity, Orbitz (
) in the very competitive online travel industry in the U.S.
Outperforming in a Tough Environment
The macroeconomic environment in the U.S. wasn't kind to the
travel industry during the 2007-09 downturn. The subprime mortgage
mess and ensuing financial markets collapse led to economic growth
rate plummeting and high unemployment levels that led to a steep
decline in disposable income levels. Amidst such harsh
conditions, one wonders what could have possibly led to such an
impressive performance of Priceline's stock?
The answer to the enviable performance of the leading U.S.
online travel agency, in fact lies outside U.S., in the fragmented
and largely untapped Asian market. International hotel bookings
through Priceline.com and its subsidiary websites contribute nearly
60% of total gross bookings volume and nearly 67% to the
consolidated operating income. Priceline's strategic acquisition of
Agoda in 2007 strengthened its foothold in the South Asian hotel
bookings market and unlocked huge growth potential which is
reflected in the stock price trajectory.
We value Priceline with a $452 Trefis price
, of which almost 90% is made up of hotel bookings along with a
healthy cash balance that accounts for 4% of its stock. Our price
estimate is roughly in line with the current market price.
Here are some of the drivers behind the growth in Asia.
Increasing Number of Travelers
Rising income levels and an expanding middle class combined with
high population growth rates in emerging economies in China, India
and South-East Asia will lead to high growth in budget leisure
travelers outside the U.S. For example, China's 1.3 billion
people take one trip per person per year on an average, which is
expected to quadruple by 2015 as the Chinese government implements
its national tourism plan.
Increasing Online Travel Bookings
Asians are increasingly using the Internet for making travel
bookings. The relatively low Internet penetration in Asia-Pacific
at around 14% compared to 32% in Europe and 56% in the U.S.,
presents much upside to the online travel industry outside the
U.S., as customers increasingly access the Internet for making
Only about 2% of travel is booked online in China, but the
adoption of the Internet for travel bookings is expected to pick up
pace with almost 30% of air ticket bookings expected to happen
online by 2013. India, the third largest economy in Asia isn't far
behind with online bookings growing to $6 billion in 2010 from $295
million in 2005, a CAGR of over 80%!
The Fragmented Lodgings Industry Outside U.S.
The hotels market in Asia is much more fragmented with smaller,
independent lodgings compared to the U.S. where large hotel chains
dominate the hotel market. 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 U.S. Also, travel agencies stand to make higher
margins from independent budget hotels. Hence, an expansion into
hotels markets in Asia presents a growth opportunity to U.S. based
online travel services providers like Priceline.
Increasing Focus on Tourism
The World Trade Organization forecasts that the global tourism
industry will add 66 million jobs by 2020, out of which 50 million
will be in Asia. Tourism is expected to come up in a big way in
Asia and in Jan 2011, the Association of Southeast Asian Nations
(ASEAN) finalized the ASEAN Tourism Strategic Plan for 2011-15,
which aims to boost tourism in the region by the development of
tourism-specific human resource, by facilitating easier
cross-border movement of workers and by developing intra-ASEAN
tourism products in association with the major Asian economies
China, Japan and South Korea. ASEAN, which consists of Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Thailand and Vietnam, received 70 million international
tourists in 2010 and given the region's potential for tourism there
has been no dearth of investments in tourism here.
The Potential Upside from Asia
We currently forecast Priceline's market share of global hotel
bookings to rise from 2% in 2010 to almost 3% in the coming years.
If however, Priceline further strengthens its foothold in Asian
markets, we estimate a 28% potential upside to our current $452
Trefis price estimate for each 1 percentage point incremental gain
in market share of hotel bookings.