priceline.com (PCLN +3.49%) is down 20% from the 52-week high it hit earlier this year, falling 5% yesterday alone after a formerly bullish analyst downgraded the stock to hold. The reasons given were that airlines are getting more competitive and Google's (GOOG +1.75%) presence in the travel space is growing.
While the online travel agent has long said it's not worried about Google's foray into the industry, its purchase of Kayak Software (NASDAQ: KYAK) was certainly made with an eye on the search king. Europe's financial house is still in shambles. raising concerns of the willingness of people to travel, and the U.S. is about to head over the fiscal cliff, creating a level of uncertainty of what the effects will be here at home.
With rival Expedia (EXPE +4.36%) converting more browsers into buyers, Priceline even had to bring back the Negotiator -- William Shatner -- to star in their commercials. In such a situation, it's easy to expect the online travel agency to continue falling short of expectations. Easy, but wrong.
Across the pond
Although best known here for its "Name Your Own Price" bidding service, Priceline actually derives more money from its traditional booking service and does most of its business in Europe. More than 82% of its $7.8 billion in gross bookings comes from international markets, which enjoyed growth of almost 30% from the year ago period compared to 7% growth in domestic markets.
And though most people also associate Priceline with airline tickets, in reality its business is hotels, hotels, hotels. So because the service is Euro-centric, it doesn't have as many hotel chains to contend with as it does here. Marriott (MAR +1.64%), Hyatt Hotels (H +4.43%), and Hilton don't carry the same leverage on the continent as they do in the U.S., allowing Priceline access to more inventory at better pricing from smaller, independent chains and operators who rely upon its heft and size to move rooms.
It purchased Booking.com in 2005 for just $135 million, yet that alone might be responsible for it being the international travel juggernaut it is today. Travel website Tnooz reports Priceline was making just $10 million a year in profits when it purchased the site; today profits exceed $1 billion as overseas revenue grew at a 68% compounded annual rate between 2006 and 2010.
Orient express
In Asia, its reservation service Agoda is achieving similar results simply because it is the go-to service there, and Priceline is using both to expand their brand awareness into Latin America and the U.S. And where Priceline had a negligible presence in China, a new partnership with Ctrip.com (CTRP +0.31%) promises to change that.
Under Priceline's agreement with Ctrip, the Chinese travel agent will have access to Booking.com's portfolio of 235,000 hotels in more than 170 countries, vastly expanding Ctrip's current 50,000 hotel offerings worldwide. Both Ctrip and Priceline will capitalize on servicing China's fast-growing outbound travel demand.
Like many of the industries it touches, China's impact on travel will be huge. The market analysts at Hogg Robinson say China will surpass the U.S. as the world's largest travel market, with expenditures hitting $277 billion by 2020, or a 16% compounded annual growth rate. PhoCusWright calls the country's growth a "dramatic realignment" in spending, where Asia-Pacific travelers will account for 22% of global traffic and a third of all travel spending.
Up a river?
And let's not forget Kayak. It's what they call a metasearch site. It compiles what others post about travel rates into one location for consumers to use. Rather than partnering with airlines or hotels itself, Kayak searches for what Priceline, Expedia, or Orbitz (NYSE: OWW) are offering -- as well as the hotels and airlines themselves -- and lists all the rates and fares to compare. It's like a search engine of search engines.
Kayak derives around 80%of its revenues domestically, which gives it a chance to use Priceline's global reach to expand while providing the agency with a chance to blunt whatever moves Google will make in travel. Kayak will allow Priceline to have an outsized presence in travel search, even reducing the amount its currently spends on Google.
It spent $375 million in the third quarter on online advertising -- no doubt almost all of it on Google -- or more than $1 billion annually. A deal that reduces costs and increases use of its own services sounds like a winning competition.
I haven't even touched on Priceline's car rental service, but despite being just a tiny sliver of its business at the moment, it's enjoying phenomenal growth. It might not be the next Booking.com acquisition, but it ought to add incrementally to revenue and profits.
Nothing to fear but fear itself
Fears of Priceline getting grounded are overblown, and the weakness exhibited in its stock should be seen as an opportunity. With its enterprise value trading at 18 times free cash flow, it's not a bargain, but it's not such a lofty valuation, either -- particularly when you factor in earnings growth estimates. I suspect that Priceline will fend off its rivals and surprise the market once again.
