PCLN - Priceline Group Inc.

[rishig]

Hello Rishig,

 

I worked briefly for booking.com (albeit a few years ago) and found your remarks spot on. I do have some concerns that I would like to share and maybe hear your thoughts about. Disclosure: I do not have a position in Priceline Group Inc.

 

As far as I remember the average commission earned by booking.com is 15% of the total room price (all the days!) as booked by the guest. But it may be 10-12% by now. Still a high commission for an average hotel, which is generally a low margin business. As bookings are done online increasingly, the commissions paid to booking.com and other OTAs may simply become unaffordable to the hotels. Something's gotta give. Remember that earlier the hotels just picked up the phone or maybe ran a call centre, but certainly did not spend 10-15% of their revenue acquiring guests. These commissions are mostly new expenses.

 

At the same time, other developments may tip the advantage towards hotels.

 

Booking.com is a pioneering technology company which hired employees with hotel expertise to interact with the hotels. Priceline.com probably too, but I know less about them. They were right early on about affiliate marketing, Google adwords, webads, mobile, social media, tracking cookies, etc etc. We may bet that Priceline/booking.com will be right again about the next online trend, but they may also miss it.

 

But more importantly: the hotel industry is no longer ignorant about the impact of the internet. They were still asleep when Booking.com was pioneering the trends mentioned above and found themselves depending on their online marketing power to get online bookings. Now that the internet is at a more mature stage, the larger hotel chains are aware they can hire technology and media experts to handle their own online marketing.

 

I agree that there are network effects at play, but I wonder if those are strong enough to prevent a shift to bookings on the hotel websites directly.

 

Great questions.

 

You bring up good points and they are really applicable to US and in particular to the hotel chains. The hotels chains have indeed become smarter. Marriot brings in 75% of its online bookings across all its brands through its own website. Hence, I think the OTAs focused on US (Expedia) will see a lot of headwinds trying to grow in the US. I think their valuation already reflects this.

 

It helps that Priceline Group's 90-95% operating income comes from international markets. In Europe, about 60% of the market is fragmented. In Asia, it is more so the case. I don't think the non-branded boutique single property hotels have the technical know how or the budget to market themselves in a fiercely competitive market. I agree that technology will change, but I bet that Priceline Group will figure this part better than any single property hotel. And may be a small % of single property hotels figure out, but that's the beauty of playing in a fragmented market. The 10-12% commission is the marketing cost of bringing in business. I don't think the non-chain hotels have a choice.

 

Having said that, the global hotel booking market is extremely large. And such high ROICs exhibited by the OTAs are bound to invite competition in the long run. I don't think the network effects are so strong that one can definitely say that 10 years from now, there will not be more competitors. And more competitors means less commissions when they all compete for the same business.

 

At current Priceline valuation, I don't think we have to predict what the competitive landscape looks like 10 years ahead to make a reasonable return in my opinion. I think they will be fine for the next 5 years and conservatively grow free cash flows at 15% cagr. If the stock doesn't move one cent from here, then 5 years from today, free cash flow be $100 a share in addition to the $300 - $400 cash on balance sheet from free cash flows in the five years in the interim + $100 cash today. Say the competitive landscape really changes, and Priceline is the new Expedia where one can only see headwinds for it. Then, one can reasonably assume that Priceline trades at 10x multiple 5 years from now, the share should be worth $1000 + whatever value one puts on $400-$500 cash on balance sheet. I am repeating my argument about valuation from before, sorry about the repetition. I don't see how one loses here. I don't think we need to answer really hard questions about competition 10 years from now. That is the reason I pass on businesses that are great (Facebook) but trade at rich valuations. I don't like answering hard questions (or really I am not smart enough to answer such hard questions).

[Ross812]

I would add the commission isn't as bad as it seems due to the way occupancy taxes are assessed on OTA hotel bookings. In Europe it is common to include these occupancy taxes in the price of the room. I.e. the price you see is the price you pay.

 

Say there is a 16% occupancy tax, and 12% commission to the OTA.

 

Scenario: the room is $100/night billed to the traveler.

 

Hotel direct booking:

 

$100 - $16 occ. tax = $ 84 to the hotel

 

OTA booking:

 

$100 - $12 OTA commission = $88 - $14 (16% occ. tax) = $74 to the hotel

 

The favorable tax treatment takes the commission down 1-3% depending on occupancy taxes in the subject country. The national governments are not keen to change these laws because they get a cut of the OTA's revenue where they have to share the occupancy tax with the city.   

 

 

[tombgrt]

Very good points rishig, thank you. I can see commissions getting lower over time by increased competition but not by pressure from the hotels. What would happen if any smaller hotel decided that 12% commission is too much and that they don't need OTA versus their competition? Wouldn't see that ending well unless they happen to own prime locations that get enough traffic. 12% is nothing when the alternative is empty rooms. Low variable costs and all that...

 

I assume most hotels use the OTA's depending on demand at a specific point in time and adjust prices accordingly. Thus they likely raise prices to account for the commission as long as it's likely that the rooms will get filled anyway. When deadlines get closer, they increase their dependence on the OTA system to fill the rooms. That makes paying some commission a lot more acceptable.

 

I am a very active user of booking.com for 3-5 weeks/year as we are active travelers that often book last minute. I think they can and likely will dramatically improve their service. Think about the way you search for hotels etc. This will further increase the value proposition for travelers and make OTA's stickier and more attractive to hotels. Another crazy idea: What about ATM-like machines connected to the OTA's system that replace hotel receptionists completely? They could offer additional discounts to customers while lowering the hotels costs and furthermore increase the moat even further.

 

Just some ramblings as I don't know much about the business! Margins might get lower but who ever really knows? They might as well increase them if they find new ways to monetize the platform. As someone else said: the industry is still in it's infancy.

 

Their numbers are impressive, lost of tailwinds (travel expected to grow 5.4% over the next 10 years, I wouldn't be surprised if it turned out to be even higher) and there is at least some moat against competition. I'm not one to quickly buy companies at 20xPE or higher but will certainly keep my eye on it. Thanks all for the discussion.

[Genyi]

I assume most hotels use the OTA's depending on demand at a specific point in time and adjust prices accordingly. Thus they likely raise prices to account for the commission as long as it's likely that the rooms will get filled anyway. When deadlines get closer, they increase their dependence on the OTA system to fill the rooms.

 

This is indeed what most hotels try to do, but booking.com tries to throw a few hurdles in the way. In general, by their contracts with booking.com, the hotels have to offer a minimum amount of rooms at all times and they have to match their lowest room rate, regardless where else they offer that price. (Note the Best Price Guaranteed on Booking.com's website.)

 

In this way, Booking.com forces itself as a permanent partner to the hotels. It's not a website which the hotels can use for dumping almost stale inventory. There are other booking sites who function as such and they may gain momentum as they offer a solution which is more in line with the hotel's interests.

 

My doubts expressed earlier were on a more general level. What is the longterm, say 15 year, value of a moat as Priceline has when it depends on an industry squeezed by low margins? Especially, if the company itself is probably the biggest squeezer? It's like delivering to the airline industry or the traditional newspapers. You are bound to run into problems at some point, even if you deliver the planes or the printing presses.

[tombgrt]

Thank you for the insight genyi. Something to think about! :)

[fareastwarriors]

What do people think of the recent quarter?

[buylowersellhigh]

Rishig,

 

You have any thoughts on TripAdvisor (TRIP)?

 

BLSH

 

Rishig,

 

  That is a great post. If I may ask,  What are your top 5 holdings?

 

roughlyright

 

Sure - MasterCard/Visa, AIG, GM, Priceline, Petroleum Geo Services

[fareastwarriors]

Hotels Fight Back Against Sites Like Expedia and Priceline

 

http://www.nytimes.com/2015/09/01/business/hotels-direct-booking-online-travel-sites.html

[karthikpm]

Hotels Fight Back Against Sites Like Expedia and Priceline

 

http://www.nytimes.com/2015/09/01/business/hotels-direct-booking-online-travel-sites.html

 

It's still so much more convenient to go to a single site that shows several hotels than to go to each website individually

PCLN has contracts with hotels that prevent the hotels from showing a lower price than listed on their sites...

Besides PCLN is 3% of the global market of bookings. There is lot more growth from consolidation to happen in the years to come

 

[rpadebet]

Ok, I don't think hotels or some big company can beat pcln moat easily. I am almost completely convinced of that. But the biggest risk i see in this is still my initial thought - can AirbnB do to PCLN  what uber did to TAXI ?

 

In my mind the disruption risk is huge. Can't these hotels list on AirBnB in future? I see and hear about a lot of people using AirbnB these days. Maybe the convenience will attract enough customers there and eventually the providers have to follow it then right? AirbnB will most likely improve and get better. We can't assume they won't be able to iron out initial problems.

 

Any insights on this threat?

 

 

[karthikpm]

Disruption risk is huge for PCLN, EXPE etc. However, in my mind online booking WAS the UBER event for the hotel industry.

 

Which one of these platforms will eventually succeed?  I don't think this is a winner take all platform.  I think there is plenty out there for all of these players to be successful.

3% of this entire booking market worldwide is very small. There is little stickiness or network effect as these models exist now ( may be there will be something transformative in the future) . For instance,  I look at 10 different websites before I book .. What most people don't realize is these 10 websites are often owned by 2-3 dominant providers. kayak.com, booking.com, agoda.com, travelink.com are all PCLN sites to name a few..

 

PCLN acknowledges that Google that has been their ally may be their biggest competitor.

I'm not sure I would assign PCLN a big moat ( or a moat at all), but their growth opportunities via acquisitions in the next few years internationally seems good.

 

[rishig]

Disruption risk is huge for PCLN, EXPE etc. However, in my mind online booking WAS the UBER event for the hotel industry.

 

Which one of these platforms will eventually succeed?  I don't think this is a winner take all platform.  I think there is plenty out there for all of these players to be successful.

3% of this entire booking market worldwide is very small. There is little stickiness or network effect as these models exist now ( may be there will be something transformative in the future) . For instance,  I look at 10 different websites before I book .. What most people don't realize is these 10 websites are often owned by 2-3 dominant providers. kayak.com, booking.com, agoda.com, travelink.com are all PCLN sites to name a few..

 

PCLN acknowledges that Google that has been their ally may be their biggest competitor.

I'm not sure I would assign PCLN a big moat ( or a moat at all), but their growth opportunities via acquisitions in the next few years internationally seems good.

 

My thoughts on PCLN:

- PCLN makes most of its revenue and profits from Europe and Asia. US is a very %, less than 10.

- The hotel industry is very fragmented in Europe and Asia. Unlike the US, it's not dominated by hotel chains.

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

- In their race to capture the customer, they will more likely be reliant on a third party aggregation website.

- Your question of whether it will be AirBnb instead of PCLN's websites - it's possible but question is how long before AirBnb can sign up all the single hotel boutiques and will the commissions they take on the bookings be lower than PCLN's commission?

- PCLN has higher ad spend than any other third party aggregation website. Hence the comment about the search engine company being an ally rather than a competitor. Any other third party website needs to spend these ad dollars to get the customer in the digital world.

- TripAdvisor recently started a direct booking program, where hotels can sign up and essentially outsource the direct booking to TripAdvisor. If they don't have the scale like the Hyatts and Marriotts, this is the best alternate to have one.

- TripAdvisor makes huge amounts of money today from EXPE and PCLN. So, it has to delicately handle how they grow the direct booking program. They are currently testing it in the US. The program has the potential to make more money than its current ad business, so in the long run, they may be okay losing PCLN's or EXPE business, but I think it will happen slowly, especially in Europe and Asia. In my opinion, TripAdvisor has the best chance of disrupting this market in the long run, but its a very small business today. Trip is way more expensive on valuation basis.

- For me, it comes down to what I am paying for PCLN. Likelihood that it will continue to grow for the next 5 years is much higher than disruption in Europe and Asia. Eventually anything is possible, but it's what you pay for what you get.

[DCG]

Thanks for your post Rishig. What are your thoughts on valuation?

[rishig]

Thanks for your post Rishig. What are your thoughts on valuation?

 

FCF/share is ~$50. I think it is reasonable for PCLN to double its FCF/share in 5 years. Say, it's no longer the high growth business 5 years from now and give it a market multiple of 15x. That itself gives you a value of $1500. Add to it, the current cash on balance sheet ($70) + cash generated in 5 years ($380) = $450. That gives you $1950. You are buying at $1250. That gives you a forward rate of return of 10%.

 

If you are used to thinking in terms of "fair value" and use a 10% discount rate, then PCLN is trading at "fair value" if you assume this to be the base case.

[Picasso]

rishig,

 

Since you seem to have a good handle on the industry/business mode, do you see any potential acquisitions that may enhance or reduce your estimate of fair value?  Any capital allocation decisions that can change the thesis?

[rishig]

rishig,

 

Since you seem to have a good handle on the industry/business mode, do you see any potential acquisitions that may enhance or reduce your estimate of fair value?  Any capital allocation decisions that can change the thesis?

 

I think the biggest thing that will change the thesis is Trip's acceleration in the Direct Booking business and their willingness to cannibalize current ad business for future (and potentially much larger) direct booking business. So far, I think Trip is just testing waters here. See recent article from NY times:

http://www.nytimes.com/2015/09/01/business/hotels-direct-booking-online-travel-sites.html

 

Priceline's management, so far, has done very sane acquisitions. Both booking.com and agoda.com were great acquisitions at very reasonable prices. If they start going off doing unrelated things and spending huge sums, I would be concerned.

[Picasso]

Booking.com was a home run considering they only spent $135 million. 

 

I ask because we've seen a couple relatively large deals in Kayak ($1.8B) and Open Table ($2.6B).  I am sort of curious on the returns one can expect from $4.4 billion of cash outlay and whether we see more of this.  Not saying it's good or bad but these deals are much larger than what produced todays massive cash flows.

[rishig]

Booking.com was a home run considering they only spent $135 million. 

 

I ask because we've seen a couple relatively large deals in Kayak ($1.8B) and Open Table ($2.6B).  I am sort of curious on the returns one can expect from $4.4 billion of cash outlay and whether we see more of this.  Not saying it's good or bad but these deals are much larger than what produced todays massive cash flows.

 

I think Kayak was fine. I am not that certain about OpenTable, but time will tell. They don't do as many deals as say the larger tech companies, so I am fine for now with their allocation strategy.

[colinwalt]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

[rishig]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

 

I wish getting customers to find your website was as simple as building one. Single hotel boutiques get the advantage of discovery by being on booking.com or tripadvisor.com. Without listing on a aggregator, how do they expect being discovered?

[colinwalt]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

 

I wish getting customers to find your website was as simple as building one. Single hotel boutiques get the advantage of discovery by being on booking.com or tripadvisor.com. Without listing on a aggregator, how do they expect being discovered?

 

That is true, that is a real problem.

[rishig]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

 

I wish getting customers to find your website was as simple as building one. Single hotel boutiques get the advantage of discovery by being on booking.com or tripadvisor.com. Without listing on a aggregator, how do they expect being discovered?

 

That is true, that is a real problem.

 

Just to give you some context:

- Priceline Group spent $2.3B on online advertising and $300M in offline advertising in 2014

- Expedia spent $1.6B on online advertising in 2014

 

Good luck to the single boutique hotels getting themselves found on their own with their minuscule budget

[undervalued]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

 

I wish getting customers to find your website was as simple as building one. Single hotel boutiques get the advantage of discovery by being on booking.com or tripadvisor.com. Without listing on a aggregator, how do they expect being discovered?

 

That is true, that is a real problem.

 

Just to give you some context:

- Priceline Group spent $2.3B on online advertising and $300M in offline advertising in 2014

- Expedia spent $1.6B on online advertising in 2014

 

Good luck to the single boutique hotels getting themselves found on their own with their minuscule budget

 

How much does AirBnB spend on online ad or is it mostly word of mouth? I think these smaller companies should give their customer a good deal so people talk about it more generously.

[rishig]

 

My thoughts on PCLN:

- The single hotel boutiques don't have the ad or IT budgets to build direct booking website (like Marriott or Hyatt).

 

wix provides an integrated "build it yourself" Hotel solution - no IT / Programming / HTML expertise required.

http://www.wix.com/app-market/wix-hotels/overview

 

I wish getting customers to find your website was as simple as building one. Single hotel boutiques get the advantage of discovery by being on booking.com or tripadvisor.com. Without listing on a aggregator, how do they expect being discovered?

 

That is true, that is a real problem.

 

Just to give you some context:

- Priceline Group spent $2.3B on online advertising and $300M in offline advertising in 2014

- Expedia spent $1.6B on online advertising in 2014

 

Good luck to the single boutique hotels getting themselves found on their own with their minuscule budget

 

How much does AirBnB spend on online ad or is it mostly word of mouth? I think these smaller companies should give their customer a good deal so people talk about it more generously.

 

I don't know why we keep coming back to AirBnb. It's a great model, possibly disruptive in the US to the aggregators. But irrelevant to Priceline Group's business (at least for 5 years), which is mostly international.

 

AirBnb is a private business. Who know what the online spend, but I can't imagine it to be too big.

[scorpioncapital]

Airbnb excels in the mid-term housing (say a 4-5 days to a few months) for travellers and special events or cities with limited hospitality options. Hotwire and Priceline work great for shorter term stays , resorts, vacations, fast booking. There is some overlap and it may get bigger. I can say that I almost never use Priceline & Hotwire anymore in favour of Airbnb but there is a lot of time and patience involved in say finding a place for a mere 3 or 4 days. There is no doubt they will take away some serious business from hotels.