Travel and tourism is one of the fastest growing sectors in the global economy, creating one out of every five new jobs worldwide, according to the World Travel & Tourism Council (WTTC). Defying negative headwinds such as slowing economic growth in China and Europe and the never-ending Brexit saga, the sector grew nearly 4% to US$8.8 trillion in 2018, accounting for 10.4% of world GDP, handily outpacing global GDP growth of 3.2%, according to a report from the WTTC.
Consistent with the global trend, the U.S. travel industry has also seen unprecedented growth, swelling from US$556 billion in 2009 to nearly US$800 billion in 2017, according to a Deloitte report. One of the direct beneficiaries of this growth is the online travel market, projected to account for 50% of total travel sales, according to research firm Research and Markets. North America, the report says, remains the world’s largest market for digital travel, while the burgeoning Asia Pacific region is rapidly gaining share.
Travelers have an appetite for apps
The greater adoption of mobile booking technology and travel apps has fuelled faster expansion of the global online travel market, projected to jump from about US$800 billion in 2018 to nearly US$2 trillion in 2026, growing 12% annually, according to Zion Market Research. Leading online travel companies are well positioned to benefit from emerging megatrends that put the online travel industry on a long runway of growth. These companies are growing their profits through widening their range of travel services, global footprints and by closely following the latest digital and demographic trends, according to Morningstar equity research.
| Expedia Inc | ||
| Ticker: | EXPE | |
| Current Yield: | 1.03% | |
| Forward P/E: | 17.73 | |
| Price: | US$119.30 | |
| Fair Value: | US$183 | |
| Fair Value Uncertainty | High | |
| Value: | 35% Discount | |
| Moat: | Narrow | |
| Moat Trend: | Stable | |
| Star Rating: | **** | |
| Data as of May 09, 2019 | ||
The world’s largest online travel agency by bookings, Expedia (EXPE) offers a rich catalogue of services including lodging (69% of total 2018 sales), air tickets (8%), rental cars, cruises, and other (14%), while advertising revenue accounts for 9% of sales. The company’s brand portfolio includes such popular names as Expedia.com, Hotels.com, Travelocity, Orbitz, Trivago, and others. Transaction fees for online bookings drive the bulk of sales and profits.
Expedia’s leading network of online travel services has driven a strong user base, says a Morningstar equity report, projecting this network effect to remain over the next decade. “We expect Expedia’s global share of the total travel booking market to reach 7.7% in 2023 from 6.5% in 2018, driven by investments in 2019, which will support the company’s network advantage,” the report says.
The digital travel firm has accelerated its marketing spending to pursue growth and boost its presence in faster growing emerging markets. The firm’s partnership with Chinese online travel agency CTrip (CTRP) is seen as particularly “crucial, as China will contribute nearly 20% of industry online booking growth over the next five years,” says Morningstar equity analyst Dan Wasiolek.
As well, the acquisition of vacation rental company HomeAway gives Expedia a leading share in the fast-growing online vacation rental market,” says Wasiolek, who puts the stock’s fair value at US$183.
Expedia currently holds more than a third of the global online travel agency booking market. Healthy market share gains and return on invested capital underpin the company’s competitive strength, asserts Wasiolek, who forecasts 21.7% ROIC (well over 8.5% cost of capital), and 9.7% sales growth over the next five years.
| TripAdvisor Inc. | ||
| Ticker: | TRIP | |
| Current Yield: | - | |
| Forward P/E: | 24.69 | |
| Price: | US$48.83 | |
| Fair Value: | US$59 | |
| Fair Value Uncertainty | High | |
| Value: | 17% Discount | |
| Moat: | Narrow | |
| Moat Trend: | Stable | |
| Star Rating: | *** | |
| Data as of May 09, 2019 | ||
TripAdvisor (TRIP) is the world’s leading travel metasearch company, offering 760 million reviews and information on 5 million restaurants, more than 1 million hotels, and a million each on vacation rentals and experiences. The company’s hotel and media segment accounted for 62% of revenue, experiences and dining represented 23% of revenue, while flight, rental, and non-branded TripAdvisor sales contributing the rest.
The firm’s network of user-generated reviews and travel content -- experiences, vacation rentals, restaurants, and hotels -- continues to drive strong traffic. “Despite intense competition, we expect TripAdvisor’s network advantage to remain in place over the next decade, supported by a solid global position, low penetration of travel advertising spending allocated online, and continued marketing spending,” says a Morningstar equity report.
The travel review company, which recently expanded to the cruise vacations market, is well positioned to benefit from the increasing global shift to booking through mobile applications. Currently, TripAdvisor ranks amongst top 10 travel iOS mobile applications in 18 markets across the globe. “Over the past decade and a half, TripAdvisor has built a leading position in travel reviews and content, which in turn has driven strong unique visitor traffic to the site,” says Wasiolek, who recently pared the stock’s fair value from US$60 to US$59, prompted by economic weakness.
The company has also been allocating considerable capital toward the restaurant and experiences markets, which represent strong growth opportunities within the online travel space, says Wasiolek, who projects sales growth of 9.3% over the next 10 years, driven by stronger long-term experience and dining revenue.
| Booking Holdings Inc. | ||
| Ticker: | BKNG | |
| Current Yield: | - | |
| Forward P/E: | 17.04 | |
| Price: | US$1736.03 | |
| Fair Value: | US$2270 | |
| Fair Value Uncertainty | High | |
| Value: | 24% Discount | |
| Moat: | Narrow | |
| Moat Trend: | Positive | |
| Star Rating: | **** | |
| Data as of May 09, 2019 | ||
Booking (BKNG), the world’s largest online travel agency by revenue, offers booking services for hotel and vacation rooms, airline tickets, car rentals, restaurant reservations, cruises, experiences, and other vacation packages. The company’s brands include Booking.com, Priceline.com, Kayak, OpenTable, Rentalcars.com, and others. The bulk of revenue and profits are generated from transaction fees for online bookings.
Booking Holdings’ dominance in the global online travel agency market is set to continue to grow over the next decade. The growth is primarily led by its leadership positions in China and Europe, and further boosted by an expanding presence in vacation rentals, restaurant bookings, and attractions, says a Morningstar equity report.
Leveraging its marketing and technology scale, the firm could snag 7% share of the US$1.6 billion global travel bookings by 2021, up from 6% in 2018, the report adds.
Booking continues to grow its user base in both developed and emerging markets. “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,” says Wasiolek, who recently lowered the stock’s fair value from US$2,300 to US$2,270, to reflect the ongoing macroeconomic headwinds in Europe.
The company has successfully extended its global presence through strategic acquisitions, which positions it well for the increasing global trend of app-based mobile bookings, says Wasiolek, pointing out that Booking.com is a top-10 travel application in 117 markets around the world.
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