With days getting longer, warmer and sunnier, the global travel industry has much to look forward to. The outlook for the industry this year is rather cheery. The U.S. economy has been growing steadily, European GDP growth has perked up, and China and India continue to lead the global economic growth.
As a result, the global travel market clocked US$1.6 trillion in 2017, making it one of the largest and fastest growing sectors in the world, according to a Deloitte report. One of the leading beneficiaries of this growth is the online travel market. Digital travel worldwide is projected to increase by 10.4% in 2018 to reach US$676 billion in sales, soaring to US$855 billion by 2021, according to The Mobile Outlook 2018, a recent travel industry study.
Newer technology trends like the growing role of mobile phones in everyday life are further fuelling this growth. In fact, mobile travel sales already account for 40% of the digital travel sales in the U.S., according to the Mobile Outlook study.
Thanks to the greater penetration of digital devices and faster internet connectivity worldwide, online travel sales already makes up as much as 70% of the total travel market in developed economies, with developing markets fast catching up, according to Euromonitor's Digital Consumer Index.
Leading online travel companies are moving swiftly to tap these digital and demographic trends. They are constantly upgrading their services and tweaking their business models to cater to the changing travel tastes that shape the rules of travel economy. Their success is apparent in fattening bottom lines, widening catalogue of travel services and broadening geographic footprint, factors making them attractive investment choices as leading participants in a multi-year growth story, according to Morningstar equity research.
| Expedia Inc. | ||
| Ticker: | EXPE | |
| Current yield: | 1.10% | |
| Forward P/E: | 21.9 | |
| Price: | US$106.39 | |
| Fair value: | US$175 | |
| Value: | 39.2% discount | |
| Data as of April 3, 2018 | ||
The world's largest online travel agency by bookings, 
Expedia (EXPE) offers an array of travel services including lodging (68% of total 2017 sales), air tickets (8%), rental cars, cruises and other (13%), while advertising revenue contributes 11% of sales. It operates branded travel booking sites such as Expedia.com, Hotels.com, Travelocity, Orbitz, AirAsia and Trivago. Transaction fees for online bookings account for the bulk of sales and profits.
A Morningstar equity report projects "Expedia's global share of the total travel booking market to reach 7.5% in 2022 from 6.1% in 2017." And while the company's online travel booking share gains could see weakness due to high exposure to the maturing U.S. market (62% of 2017 bookings), it is still forecasted to grow 15% over the next several years, the report says.
The digital travel firm is accelerating its marketing spending to bolster its international presence. In emerging markets, the company's partnership with CTrip, a leading Chinese online travel agency, is "crucial, as China will contribute nearly 20% of industry online booking growth over the next five years," says Morningstar equity analyst Dan Wasiolek.
Further, the acquisition of HomeAway gives Expedia a leading share in the fast-growing online vacation-rental market and a bookings spurt.
Although Wasiolek recently lowered his fair value estimate for the stock from US$178 to US$175, prompted by a fourth-quarter profit miss, he assures the market's concerns over increasing competition and investment are misplaced and are the reason why the stock is trading at more than a 30% discount to his estimate of its fair value. "Expedia's market position is unwavering with no signs of cracks, supported by solid trends in its international and vacation rental segments," he says.
| TripAdvisor Inc. | ||
| Ticker: | TRIP | |
| Current yield: | - | |
| Forward P/E: | 30.7 | |
| Price: | US$39.52 | |
| Fair value: | US$55 | |
| Value: | 28.1% discount | |
| Data as of April 3, 2018 | ||
The world's leading travel metasearch company, TripAdvisor (TRIP) offers over 600 million reviews, as well as information on 4.6 million restaurants, more than 1 million hotels, and a quarter of a million each on vacation rentals and tourist attractions. In 2017, 77% of revenue came from the company's hotel segment, and the rest from its non-hotel segment including vacation rentals, attractions and restaurant revenue.
The company's robust network of user-generated reviews and travel content continues to drive increasing traffic. The company's network advantage stands to remain intact and positions TripAdvisor well for the increasing global trend of booking through mobile applications, says a Morningstar report, adding that this network advantage will be able to reaccelerate double-digit sales growth starting in 2019.
"Organically, TripAdvisor launched its Instant Booking initiative, which strives to collect a piece of the bookings transactions that previously had not been collected," says Wasiolek, who puts the stock's worth at US$55. "Inorganically, we are encouraged that the company has allocated capital toward acquisitions within the restaurant, vacation rental, tour and attraction markets, as these markets have strong growth opportunities within the online travel space."
These initiatives bolster the firm's business model and revenue opportunity. Of particular note is Booking's strong position in international markets, which "are less penetrated than domestic markets and have more boutique than branded hotels," especially in Europe where they represent about 65% of the market versus only 30% in the U.S, asserts Wasiolek, who forecasts 10% annual sales growth over the next five years, and operating margins expansion from 8% in 2017 to 23% in 2022.
| Booking Holdings Inc. | ||
| Ticker: | BKNG | |
| Current yield: | - | |
| Forward P/E: | 23.2 | |
| Price: | US$2,058.50 | |
| Fair value: | US$2,300 | |
| Value: | 10.5% discount | |
| Data as of April 3, 2018 | ||
Booking Holdings (BKNG), formerly Priceline Group, is the world's largest online travel agency (OTA) by revenue. It offers booking services for hotel and vacation rooms, airline tickets, rental cars, restaurant reservations, cruises and other vacation packages. The company's branded travel booking sites include Priceline.com, Booking.com, Agoda, OpenTable, Rentalcars.com and Kayak. Transaction fees for online bookings account for the bulk of revenue and profits.
Booking's global OTA leadership position is set to expand over the next decade, driven by a strong position in China, continued leadership in Europe and a growing presence in vacation rentals and restaurant bookings, says a Morningstar equity report, which projects the firm's global share of total travel bookings to grow from mid-single digits in 2017 to high single digits in 2020.
Having built a formidable network of hotel properties and other services, the company is rapidly expanding globally.
"In developed markets, replicating Booking's leading network in Europe is proving costly for key competitors, as boutique hotels (a substantial portion of the region's market) that are already signed with Booking may face labour and expense constraints in joining multiple distribution channels," says Wasiolek, who projects a 12% annual revenue growth over the next five years. "In emerging markets, the firm is expanding its leadership in China with its Ctrip and Meituan-Dianping partnerships, and in its own booking.com and Agoda.com platforms, which is crucial, as we see the Asia-Pacific region representing nearly half of total industry online booking growth over the next five years."
Booking, like Expedia, controls over 30% of the OTA market, leaving little scope for new entrants to gain traffic, says Wasiolek, who recently raised the stock's fair value from US$2,100 to US$2,300, "driven by stronger near-terms bookings growth."
