It’s not often you get a second shot at a business model that revolutionized an industry – and made investors rich. Yet that’s precisely what Priceline.com Inc (NASDAQ:PCLN) offers.
Why it’s a core holding
Priceline revolutionized the way people make travel reservations. In the past decade, Americans and Europeans said goodbye to their old-fashion travel agent and began making their trip arrangements online.
During that time Priceline.com Inc (NASDAQ:PCLN) emerged as the perfect market-maker. For consumers, Priceline was a simple and quick way to find great deals. For businesses like airlines and hotels, Priceline allowed them to clear inventory anonymously without damaging their brand.
The formula was incredibly successful and shareholders profited handsomely. Now Priceline wants to apply the same business model to international markets. Strong positions in the world’s hottest economies make the company the fastest growing online travel agency, or OTA, in the world.
Though its Agoda property, Priceline.com Inc (NASDAQ:PCLN) is well positioned in Southeast Asia. According to a report by eMarketer, fewer than 25% of travel reservations in the region are made online. This represents a massive market projected to grow at a 20% annual clip through 2016.
China is an even bigger prize. According to analysts at Hogg Robinson, China will surpass the United States as the world’s largest travel market by 2020, growing at a 16% compounded annual rate during that time frame.
Priceline.com Inc (NASDAQ:PCLN) has boosted its presence in the country through a new partnership with Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). The deal will give Ctrip.com access to Booking.com’s 235,000 hotels in 170 countries – up from the 50,000 the company has currently.
The partnership is truly a win-win for both companies. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has secured its position as the biggest online travel agent in China. According to iResearch China, the company owns over 45% of the online travel market in the country. Meanwhile Priceline gains exposure to the globe’s most important travel market.
Priceline.com Inc (NASDAQ:PCLN) is also expanding operations in the industry’s fastest growing geography – Latin America. According to eMarketer, less than 20% of travel reservations are made online, and the market is projected to grow 30% annually through 2016.
But Priceline has also developing sustainable competitive advantages that it will be able to exploit for years to come.
First, the company’s enormous reach: Last quarter Booking.com – a Priceline property – reported 245,000 hotel partners, up 44% from the previous year. This is a network business where consumers gravitate towards the largest platforms with the biggest inventories.
Second, scale: Costs in this business are largely fixed so the bigger you are the bigger your returns for shareholders. As the largest player in the industry, Priceline.com Inc (NASDAQ:PCLN) has consistently posted better operating results than its peers.
Risks to watch
Of course when dealing with such an aggressive growth stock there’re always risks that investors have to be on the lookout for.