Online travel agents such as Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE) have been under pressure lately. In the six months leading up to their fourth quarter earnings calls, the stock price for both companies were down about 20%.
Two major sources of concern for investors are the strong dollar and Airbnb. The first should be relatively short-lived, as currency exchange rates are cyclical. Airbnb, on the other hand, can pose a long-term threat to the hotel and accommodation industry.
As a private company, Airbnb doesn't release detailed financials. However, a Wall Street Journal report indicated that Airbnb was expected to finish 2015 with $900 million in revenue. The Airbnb website says the company is in over 34,000 cities with more than two million listings worldwide.
With numbers like these, it's hard to see how the online vacation rental marketplace is not a threat to traditional hotels and online travel agencies. However, the top two players see Airbnb's success as an opportunity. In a recent interview with MarketWatch, Expedia CFO Dara Khosrowshahi commented, "We haven't seen any impact from Airbnb, but what we did see is an opportunity to expand into the traditional vacation rental market and urban sharing economy that Airbnb has essentially created."
Expedia completed its acquisition of vacation rental site HomeAway in mid-December. Khosrowshahi estimates the alternative accommodation space to be a $100 billion market, large enough for more than one competitor. Today, HomeAway has over one million listings in 190 countries. Although Expedia didn't break out HomeAway results, total gross bookings in 2015 at Expedia grew 24% over the prior year to $59.7 billion. Room nights, a metric that is unaffected by currency fluctuations, increased 36%.
Priceline had a similar story to tell. Excluding currency effects, annual gross travel bookings increased 25% from the prior year. Room nights in the fourth quarter increased 27% as well. Booking.com, which accounts for 87% of Priceline revenue, increased its footprint to over 850,000 locations, up 34%. As for the vacation rental space, Priceline has grown the number of homes, apartments, and villas from 110,000 locations in 2013 to nearly 400,000 today.
Going forward, Priceline is looking to take advantage of the growing non-hotel accommodation market. CEO Darren Hutson had this to say about vacation rentals, "With our worldwide team and market-leading profitability, we are expanding this low friction model more aggressively into the single-owner, single-room market as it continues to mature."
To date, Priceline has grown its vacation rental business organically. The company seeks to differentiate itself from Airbnb and HomeAway by not charging fees and allowing customers to book a property instantly. Currently, both Airbnb and HomeAway charge fees to the customer and property owner. Huston expanded on Priceline's vacation rental strategy:
We're building it out in an instantly bookable verifiable way, which is very different than what say a HomeAway or an Airbnb is doing. We've also focused a lot on making sure the customer experience didn't have all the friction. If you can think of booking a vacation home and having to put down a deposit and having multiple email exchanges and not really knowing you've got the property, not really having the trust. We're doing it in much more of a kind of a pure e-commerce way, just trying to create it ultimately like booking a hotel.
Although a no-fee, instant booking model is beneficial to the customer, it will be interesting to see how individual property owners take to the idea. Being able to screen potential guests and getting comfortable with them is a part of Airbnb's advantage over traditional property bookings.
Nonetheless, with Expedia and Priceline shares up 10% since releasing rearnings, some of the concerns that Airbnb is taking market share from the online travel agents may have been put to rest. The global online travel booking market is estimated to be $1.2 trillion, leaving room for many winners. However, as consumers become more comfortable with room sharing long-term, the hotels may see more rapid market share declines. This is definitely a trend to keep an eye on, but for now, it appears that Expedia and Priceline are positioning themselves to take advantage of a tremendous market opportunity.
Palbir Nijjar owns shares of Priceline Group. The Motley Fool owns shares of and recommends 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.