It used to be that if you believed a rental-car company would do well, you would invest in one. If you thought a hotel was going to be profitable in the future, you would invest in it. That remains a logical strategy, but today there is another option: online travel agencies, or OTAs.
Years ago there was no such thing. Today OTAs are the fastest-growing entity in the travel sector and make for sensible investments.
OTAs are growing
In 2012, the online travel business in the US crossed the $100 billion threshold. Since that monumental year, hotel bookings via OTAs have risen 12%. Comparatively, the increase of bookings made directly on hotel websites was only up 5%. With hotel websites attracting just 33% of all bookings, OTAs are becoming increasingly popular.
Electronic-revenue maximization company eRevMax believes OTAs are popular because of the metasearch features offered. It found that 60% of travelers comparison shop, which makes OTAs a popular place to do business.
Others in the industry are taking notice of this growth. In order to boost revenue, traditional travel agencies are copying the OTA strategy and investing in technology and building an online presence.
While some airlines and hotels shy away from OTAs to avoid paying commission fees, independent hotels are moving in the opposite direction. OTAs have a much larger advertising budget, access to more consumer data, and more success at drawing in online traffic. Independent hotels therefore find OTAs to be useful marketing platforms to help reach markets previously unavailable.
OTAs as a diversification strategy
Risk goes along with all investments, but diversification can protect investors against some types of risk. Unsystematic risk events are negative events that affect one company or sweep across one sector. By investing in many sectors, you can limit the impact of unsystematic risk on your portfolio.
It is wise to diversify outside of the technology and travel sectors, as there are many unsystematic risk events that can hurt both sectors, sometimes simultaneously. Having completely unrelated investments may protect against this. Within travel and tech, however, the stock of OTAs make a great diversification option and a good entry point for beginners.
OTAs offer a buffer zone. OTAs sell airfare, rental cars, hotels, cruises, vacation packages, and sometimes even tours and activities. By doing business across industries, an OTA is more sheltered from isolated risk events than the individual companies whose tickets it sells.
Mark Mahaney of RBC Capital Markets noted an example of this in his online consumer activity report. While Expedia (NASDAQ:EXPE) experienced a decrease in US paid hotel rates, it experienced a countering increase in domestic organic hotel bookings. If invested solely in US hotels at this time, the effects of the decrease in bookings would have been noticeable. If invested in Expedia, however, the increase in bookings from other products Expedia sells would have offset the negative effect.
A second common suggestion for diversification is to invest partially in foreign securities. This is to not be adversely affected by an overreaching domestic economic event like a downturn in the US economy. An OTA stock can help diversify in this manner since OTAs typically own and operate websites that service the globe.
Mahaney noted in his report that while Priceline.com (NASDAQ:PCLN) experienced a drop in US paid-hotel purchases, this was "offset by increases in the same category by its Booking.com subsidiary, which is known for servicing Europe." By operating websites across the world, Priceline was able to offer investors a buffer against the drop in US bookings.
OTAs worth consideration
Priceline is one OTA that can help investors diversify in both ways. It sells products from multiple industries and through its subsidiaries operates in more than 180 countries. With a website portfolio with such a global reach, the company is less likely to be hurt by unsystematic risk events in a given economy.
Priceline's focus going forward will be to expand in emerging markets. The company may look to another acquisition as it works to obtain a larger international market share.
Priceline stock rose 80% last year. Based on third-quarter results, operating income has increased the last two years at a 31% rate. Owing to an 83% increase from 2010-2011, operating income has risen 219% since 2010.
Diversification does not just benefit investors. If companies can manage to diversify by offering a wide variety of products, its a great revenue strategy. Expedia is considering doing just that; and as it does investors will reap the benefits.
Like Priceline, Expedia wants to expand its offering of tours and activities. An Expedia managing director was quoted as saying that the company is working to become an "end-to-end travel service." It is yet to be seen whether it will accomplish this by contracting directly with suppliers or acquiring start-ups that already have those supplier relationships developed.
HomeAway (NASDAQ:AWAY) is a portal for renting vacation homes worldwide. It is unlike Priceline and Expedia as it only sells lodging, but it still offers investors a risk buffer by operating websites across 171 countries.
HomeAway acquired more than 20 companies since 2005 and is expected to make another acquisition in the future if it goes through with a second public offering. With each acquisition the parent company becomes stronger and better insulates investors from risk.
Investors should take comfort in the fact that OTAs are conglomerates. By having a strong multinational presence and bringing many industries under one parent company, OTAs offer a smooth entrance to travel stocks. With travel booking moving more online, the exponential growth of the past few years should continue to make OTA stocks a strong buy.
At more than $1,000 a share, Priceline requires a high buy-in. It is far from the only option however. To find more companies that offer risk buffers, look to where the acquisitions are occurring.
Investing in OTAs will quickly get you a hand in every industry in the travel sector. As those industries rise and fall, you will experience steady growth thanks to the diversification strategy inherent in the OTA business model.
Fool contributor Benjamin Szweda has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.