Ctrip (NASDAQ:CTRP) and Baidu's (NASDAQ:BIDU) Qunar (NASDAQ:QUNR) are rallying higher on Tuesday amid reports of a merger or partnership. While talks are still in their infancy, such a deal could create cost synergies in a highly competitive Chinese online travel market. Yet, despite the optimism that's been created, investors might still be best suited with Priceline (NASDAQ:PCLN).
A deal that makes sense
Ctrip and Qunar are each getting over a 10% pop on Tuesday; this following a report on Bloomberg of a potential merger. Qunar is owned in large part by Baidu, a 58.8% stake, and is important to Baidu's footprint in the travel industry and its continued growth in advertising.
In fact, China's online travel market is expected to be worth $75 billion in the next three years, and the majority of its business comes from China's 618 million Internet users via search. Therefore, Baidu is well-connected to this industry as China's Internet/search giant, which is why it makes sense for Ctrip to partner with Qunar for operational synergies and increased exposure.
With that said, China's online travel companies have been at a bit of a pricing and mobile war as of late. After rallying 130% in 2013, shares of Ctrip have traded flat and volatile in 2014 thanks to new coupon plans, which boosted volume but consequently decreased margins. On the other hand, Qunar has thrived, up more than 100% from its November 2013 IPO, having seen strong download activity on both Android and iOS apps and large expansion in both flight and tax-booking over the last year.
Granted, Qunar is a very small company with just $135 million in revenue during the last year – growing at a 70% pace – compared to Ctrip's $859 million in annual sales. Still, with Ctrip's growth expected at just 27.8% in 2014, this partnership could boost growth and increase its exposure on search, which are two key areas of need.
Priceline is still the 800-pound gorilla
With all things considered, a Qunar (Baidu) and Ctrip partnership/acquisition means more pricing power and the replacement of a competitor with a peer. Nonetheless, Ctrip, Qunar, and Baidu still have to contend with the 800-pound gorilla that is Priceline.
Relatively speaking, Priceline is an American company, but has a presence in nearly 200 countries. Hence, North America may be Priceline's most significant market, but according to management in its fourth-quarter conference call, China may be its largest market in the future.
Albeit, Priceline is a very diversified company, and through Booking.com it saw 85% of its gross bookings come from international markets, including 94% of consolidated operating income, and its Asia/Pacific region, including China, is a major reason.
So, while Ctrip, Qunar, and Baidu have inconsistent and volatile margins, Priceline, as a pure play in online travel, has seen six consecutive years of operating margin improvements. Not to mention, Priceline's 25% growth is expected to continue through 2014, and Booking.com has become a very pleasant and disruptive unit for the travel giant.
Specifically, Booking.com's mobile accommodation bookings grew 160% in 2013 to $8 billion, which is an area where Chinese travel companies have struggled. Essentially, Booking.com is selling itself, and its presence in China is becoming more visible. With that said, Qunar and Ctrip may perform well for a while, but Priceline's Booking.com thrives with a global network of travelers, and this fact makes it primed for continued success regardless of its Internet search presence on Baidu.
Priceline shares have fallen 15% in the last month, and is now trading at just 18 times next year's earnings. For a company with 20% plus growth, 18 times earnings is not expensive, instead, it's cheap!
With that said, Priceline is just now making its presence known in China, and has spent the last few years creating dominance in other areas of the world like North America and Europe. Today, Asia is the company's growth engine, which has a massive population and a highly fragmented market to monetize.
Thus, Qunar and Ctrip are rightfully so trading higher on Tuesday, but in retrospect, Priceline has the best opportunity to own the Chinese market long-term. And with this market's size, growth, and Priceline's valuation, it looks like the best investment within the space.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Baidu, Ctrip.com International, and Priceline Group. The Motley Fool owns shares of Baidu and Priceline Group. 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.