More Growth Room Ahead For Priceline Group Inc (NASDAQ:PCLN), But Nothing Will Come On A Silver Platter
Priceline Group Inc (NASDAQ:PCLN)’s operations in the online travel industry span several market segments. As an industry leader, Priceline enjoys a number of competitive advantages, especially when you talk about expertise and experience in dealing with industry trends. However, the incumbency of Priceline also exposes the company to immense competition, both from established rivals and startups.
The online travel services industry is growing rapidly both domestically and abroad. The growth is particularly fueled by many businesses (hotels, airlines, vacation providers) that are moving their bookings to online from offline. However, despite the existence of huge growth opportunities in the online travel industry, nothing comes easy here, not even for established players such as Priceline.
Priceline generates money through three sources, namely direct sales (26% of revenue), agency (69% of revenue) and advertising/others (5% of revenue). The company’s major rivals are MakeMyTrip limited (NASDAQ:MMYT), Expedia Inc (NASDAQ:EXPE) and Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP).
This analysis of Priceline looks at the company’s opportunities and challenges, with the view of making the stock more understandable for existing and potential investors.
Growth potential in North America
In North America, airlines, hotels, cruise ships and other vacation providers are moving their bookings online from offline. The trend is gaining momentum as many providers learn about the benefits of enabling customers to make reservations conveniently on the Internet. As such, the ongoing shift of bookings online is widening the total addressable market for online booking agencies, such as Priceline.
In the U.S., Priceline already enjoys the leading share of the domestic restaurant reservation market. The company can leverage its expertise, experience and reputation in the hotel reservation space to grab more share of the rapidly expanding domestic online bookings market.
Opportunities on the International scene
The international market presents a greater growth opportunity than the domestic market. In Europe, for instance, the online travel booking market is expanding faster with more growth expected several years into the future. Given its multiple international growth efforts, Priceline stands to benefit from the ongoing penetration of online bookings in Europe.
In Asian countries, Priceline Group Inc (NASDAQ:PCLN) is betting on Agoda and booking.com to grab online booking opportunities in the region. China is a particularly promising market for online travel agencies. The company is expected to register the strongest increase in business and leisure travels for the next couple of years. Priceline moved to ink a deal with China’s homegrown travel agency Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). The deal exposes Priceline to China’s lucrative and rapidly expanding online travel bookings industry, especially the cross-border travels market.
But there is more to Priceline’s global ambitions. In addition to its multiple native growth strategies, the company is also buying growth as part of its overseas online bookings land grab.
Priceline recently acquired Australia-based AS Digital to bolster its restaurant reservation business on the international scene. Through OpenTable, Priceline already rules North America’s online restaurant booking market, but its penetration abroad remains limited. TripAdvisor Inc (NASDAQ:TRIP), Priceline’s main rival in the restaurant reservation business, is aggressively expanding overseas through acquisitions of strategic assets. That explains why Priceline is working hard to catch up with the competitor, and the acquisition of AS Digital will significantly provide the much-needed growth engine fuel for the global mission in the restaurant booking space.
By integrating AS Digital into OpenTable, Priceline is looking to accelerate the expansion of its presence in markets such as Australia, Japan and other Asia-Pacific countries.
AS Digital’s table reservation software called ResPAK is available in 40 countries on Web and mobile. At the time of acquisition by Priceline, AS Digital boasted about 2,500 partners globally and had fulfilled about 250 million dinner bookings through its table reservation software.
Innovative marketing strategy
Priceline Group Inc (NASDAQ:PCLN)’s competitive advantages include its unique marketing approach that allows it to cater to both premium and budget customers. The company has two innovative marketing strategies, namely “price-disclosed “and “opaque”.
Under “price-disclosed” is a marketing strategy that targets premium customers. Then there is “opaque,” which is a budget market focused rendering. In “opaque,” price details are not disclosed to customers, instead, customers are invited to quote their own price.
By targeting premium and cost-conscious customers, Priceline is able to help supplier-partners (hotels and others) to fill their vacant rooms at a discount price. Moreover, the strategy provides Priceline with incremental revenues where there would be none in normal booking fashion.
Healthy balance sheet
Priceline Group Inc (NASDAQ:PCLN) can afford to acquire more strategic assets to bolster its campaigns on the international scene, because it has the resources and can raise more funds cheaply. The company finished the last quarter with a balance of $3.2 billion in cash and short-term investments. The low interest rates environment also means that the company can raise more funds through low-cost debt. The management has already seized the opportunity in the cheap debt market to raise funds with part of the extra cash being allocated to shares repurchases.
International operation is the largest revenue contributor to Priceline. The company generated 87% of its revenues overseas and 13% domestically in 2014.
Potentially challenging areas for Price
Sluggish domestic market:
The stronger U.S. dollar against many foreign currencies has complicated matters for many domestic companies with international presence such as Priceline Group Inc (NASDAQ:PCLN). For the travel industry, the strong dollar has made inbound international travels costly, thus weakening cross-border travel bookings to the U.S., and Priceline is among the online agents feeling the pinch.
Things have not been made any better for Priceline given its low exposure to the domestic online travel agent (OTA) segment market. The company’s share of the U.S. OTA market is only 16% compared to 79% for Expedia.
There exists a dispute about how to tax the incomes of online travel companies. The outcome of litigations about tax disputes can be difficult to predict. However, on a bad day, tax disputes can be costly as they are disruptive to a business, and Priceline is prone to those challenges.
Tough operating environment:
Although Priceline Group Inc (NASDAQ:PCLN) is leading in some key online booking segments, such as hotel reservation in the domestic market, Expedia is a serious threat to its survival. Both companies are expanding abroad and Expedia is in the lead. In addition to trying to catch up with Expedia, Priceline will also face homegrown rivals in the new markets it is entering into. A tough competitive environment could see Priceline being faced with pricing pressure that limit margins expansion or even erode margins.
There exists exciting growth opportunities in the online bookings space, but Priceline Group Inc (NASDAQ:PCLN) will have to fight hard to defend its share and gain more domestically and abroad.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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