As summer approaches, business outlook for some industries turns particularly sunny. One of them is the global online travel market, a key component of the US$1.2 trillion worldwide travel industry.
The market for online travel is undergoing rapid expansion spurred by the rise in the millennial population, favourable socio-economic factors, growing internet access and explosion in the use of smartphones, especially in emerging markets. These global trends are creating a strong tailwind for online travel companies.
Worldwide online travel sales are projected to jump from US$590 billion in 2013 to US$950 billion by 2018, by which time it will constitute 31% of total travel sales, according to Euromonitor. Highlighting the dominance of mobile digital devices in everyday life, the research firm forecasted that by 2019 global mobile travel sales will account for 25% of the total online travel bookings. As the proportion of the world's online population swells from 40% in 2015 to the high 40s in 2020, annual online travel booking is set to grow 9% to 10% over the next few years, according to a Morningstar report.
Leading online travel companies are well positioned to take advantage of these demographic and geographic trends. These companies are constantly fine-tuning their business model to adapt to new technologies. With strong balance sheets, increasing exposure to faster-growing emerging markets and a commanding place in an oligopoly industry poised for multi-year growth, these firms offer sound options for long-term investors, according to Morningstar equity research.
| TripAdvisor Inc. | ||
| Ticker | TRIP | |
| Current yield | - | |
| Forward P/E | 29.5 | |
| Price | US$67.32 | |
| Fair value | US$81 | |
| Data as of May 30, 2016 | ||
The world's leading online travel search company, 
TripAdvisor (TRIP) offers a wealth of reviews, information on restaurants, hotels and accommodations, and vacation rentals on its website. The company's hotel segment accounted or 85% of revenue in 2015, while the non-hotel segment, comprising vacation rental, attractions and restaurant revenue, contributed the rest.
"Penetration levels are low and growing in the online travel advertising, emerging, mobile markets, vacation rental and attraction markets," noted Morningstar equity analyst Dan Wasiolek in a report. "As the world's largest travel metasearch company, the firm is well positioned to benefit over the long term."
The company can generate meaningful growth through business model expansion and potential acquisitions, Wasiolek said.
"Organically, TripAdvisor launched its Instant Booking initiative, which strives to collect a piece of the bookings transactions that previously had not been collected by the firm [thereby] expanding the revenue opportunity," he said. "Inorganically, the company has been allocating capital toward acquisitions within the restaurant and tours markets [that have] strong growth opportunities within the online travel space."
Morningstar forecasted adjusted return on invested capital to average 110% for the next five years, while operating margin to nearly double from 15.5% in 2015. Wasiolek put the stock's worth at US$81 and forecasted annual revenue growth of 14% for the next decade.
| Expedia Inc. | ||
| Ticker | EXPE | |
| Current yield | 0.86% | |
| Forward P/E | 15.7 | |
| Price | US$112.29 | |
| Fair value | US$145 | |
| Data as of May 30, 2016 | ||
A first port of call for millions of vacationers globally, Expedia (EXPE) is the world's largest online travel agency. It offers booking services for hotel rooms, airline tickets, rental cars, cruises and other vacation packages through popular booking sites such as Expedia.com, Hotels.com, Travelocity and HomeAway and earns the bulk of its revenue from transaction fees for online bookings.
The company has created a leading network of online travel services by making strategic acquisitions and leveraging its technology and marketing, as well as tapping various industries within the broader travel market. This network effect "should support strong growth over the next few years," said a Morningstar report.
Expedia has more than 30% share of the global online travel agency booking market while its global share of the total travel booking market is projected by Wasiolek to jump to the high single digits in 2020 from 5.1% in 2015, driven by "the Travelocity and Orbitz acquisitions, along with recent transactions in emerging markets."
Notably, the booker's China expansion -- a market expected to contribute 30% of industry growth over the next decade -- could serve as a cushion in a weaker economic environment, said Wasiolek, who pegged the stock's fair value at US$145, almost 30% above its current price.
| The Priceline Group Inc. | ||
| Ticker | PCLN | |
| Current yield | - | |
| Forward P/E | 15.9 | |
| Price | US$1273.00 | |
| Fair value | US$1800 | |
| Data as of May 30, 2016 | ||
The world's second-largest online travel agency, Priceline Group (PCLN) provides booking services for hotel and vacation rooms, airline tickets, rental cars, restaurant reservations, cruises and other vacation packages. Transaction fees for online bookings, made through its sites including Priceline.com, Booking.com, OpenTable, Rentalcars.com and Kayak, rake in the bulk of revenue and profits.
"We expect its leadership position to expand over the next decade, driven by a superior position in China, continued leadership in Europe, and expanding presence in vacation rentals and restaurant bookings," Wasiolek said in a Morningstar report that projected the firm's global share of bookings to reach high single digits in 2020 from 4.7% in 2015.
The company is growing its emerging markets share through local partnerships, which are crucial given that "developing regions will be representing around 60% of total industry growth over the next five years," said Wasiolek.
Based on "Priceline's superior position in emerging and mobile markets, continued leadership in Europe and expanding presence in vacation rental and in-destination bookings," Morningstar projected mid-teen annual agency booking growth and 12.7% annual booking growth over the next 10 years.
Priceline's stock currently trades more than 40% below Wasiolek's fair value estimate of US$1,800, earning it a 4-star Morningstar rating.
| Travelport Worldwide Ltd. | ||
| Ticker | TVPT | |
| Current yield | 2.27% | |
| Forward P/E | 9.8 | |
| Price | US$13.31 | |
| Fair value | US$18 | |
| Data as of May 30, 2016 | ||
As a global distribution system (GDS) operator, Travelport Worldwide (TVPT) provides technology, payment, mobile and other solutions that connect travel providers with travel agencies and consumers. International markets accounted for 71% of the firm's 2015 revenue while the U.S contributed the rest. Transaction fees, which are tied to volumes and not price, generate the bulk of revenue and profits.
"We expect Travelport's global distribution system revenue share to gradually increase to 32% in 2020 from roughly 30% in 2015, driven by its leading position in fast growing areas (payment, hotel, air merchandising, mobile, international traffic)," Wasiolek said in a Morningstar report.
The company's GDS network hosts content from all airlines, resulting in large industry share. "This scale of content attracts use by both traditional and online travel agents (who receive incentive fees from Travelport to book on its GDS), which in turn incentivizes airlines to provide more inventory to the platform," said Wasiolek, who put the stock's worth at US$18.
Some of his key projections include a 2.4% annual growth in the number of transactions from 2016 to 2025, with 3% annual growth for revenue per transaction for the same period. Wasiolek also forecasted average return of invested capital in the mid-teens for the next several years, and 5.4% annual growth for the Travel Commerce Platform over the next decade.
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