With Priceline's ( PCLN ) 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 Expedia ( EXPE ) and competes with other leading online travel agencies such as Travelocity, Orbitz ( OWW ) 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 estimate , 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 travel plans.
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.