Question: Is now a good time to invest in travel stocks?
Online travel companies have dramatically changed their industry - so much now that a "travel agent" is an all-but-extinct job description. As is so often the case, though, there is a big difference between good companies and good stocks. While many of these companies have relatively bright futures ahead of them, the combination of economic uncertainty, competition and investment spending suggest that now is not the right time to start significant positions.
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The Economic Elephant
To a large extent, the travel industry thrives and wilts on the economic confidence of families and businesses. While companies like Priceline.com (Nasdaq:PCLN), Expedia (Nasdaq:EXPE), Orbitz (NYSE:OWW) and TripAdvisor (Nasdaq:TRIP) aren't necessarily built around the business traveler, the fact remains that the significant ongoing reduction in business travel represents, at best, a mixed blessing - increasing cost-sensitivity means that more workers are required to shop around for deals, but lower overall activity is a headwind.
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Economics (or the perception of it) is also a major factor in individual/family leisure travel. While there are appreciably fewer mentions of "staycations" nowadays, it makes sense that if economic concerns are leading to fewer medical procedures, more store-brand buying and fewer big ticket purchases, it is also weighing on the travel sector. While a desire on the part of travelers to find bargains and stretch dollars further does help Kayak (Nasdaq:KYAK), MakeMyTrip (Nasdaq:MMYT) and Expedia, less overall available discretionary income is a threat.
A valid question, then, is whether this is the lull in spending or the beginning of another adverse cycle. Consumer confidence has been improving, but it's still shaky and at relatively low absolute levels.
Competition More of a Threat
Just as online travel proved to be an insurmountable force against the traditional travel industry, there are growing worries about competition within the space. For starters, companies like Kayak, Expedia, Priceline.com and Orbitz are spending large sums on marketing and advertising against each other in an attempt to drive traffic and gain share. In the case of Expedia and Orbitz, for instance, both companies are likely looking at substantial investments and spending if they want to take on Priceline.com's sizable European presence, to say nothing of building their Latin American and Asian businesses.
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Google (Nasdaq:GOOG) also looms large as a threat. TripAdvisor's reviews-based model could be particularly vulnerable to a greater focus from Google, particularly as a large percentage of the company's traffic comes through Google. If Google can redirect that traffic to their own offerings, TripAdvisor will find itself in a tougher situation.
More broadly, there is also a risk that other companies will try to disintermediate these online providers. Airlines and hotels would rather you book with them and they are increasingly building their loyalty/reward programs around encouraging this behavior. To the extent that individual airlines, hotels and car rental companies can break up the bundling of online travel companies, it represents a threat to the model.
Valuation and Expectation Versus Growth
Despite the wobbly global economic picture, many of these travel stocks have been fairly strong this year. As a result, Kayak, Priceline.com, TripAdvisor and MakeMyTrip don't look especially cheap based on trailing EBITDA/EV or future discounted cash flow.
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The Bottom Line
While some of these companies are likely to meet or exceed expectations and validate their valuations, there isn't enough business out there for everybody to succeed. Tying together the stock performance of the sector, the risk of competition from the likes of Google and the economic conditions, it is hard to be bullish about the sector as a whole. There are individual stories worth exploring, but investors need to be cautious and discriminating in their selections.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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