The Covid-19 pandemic has hit the travel industry hard, including online travel agencies, or OTAs. Yet these were already facing headwinds going into the crisis, argues Bernstein, meaning that investors should proceed with caution.
Analyst Richard Clarke initiated coverage of OTAs with a cautious long-term view on Tuesday.
The fact that “we, lodging analysts rather than internet analysts, are covering the OTAs is in itself telling,” he wrote. “These are no longer 30%+ growth disrupters, but established parts of the travel landscape, in even competition with their underlying product and themselves being disrupted by tech intrusion, notably from Google (GOOGL).”
This leads him to believe that the OTAs’ core business model of hotel disruption and providing metasearch capabilities is slowing for the three main players—
(TRIP)—and that share gains from competitors could “abate or even reverse.”
Revenue from hotels was 23% in the decade ended 2019, but is set to slow to the mid-single digits post-pandemic, Clarke says, with branded hotels wrestling back control of their distribution. Other travel-related experiences, from home rentals to flight packages often carry lower margins, and while selling experiences—from group tours to wine tastings—may be most promising in terms of profit, Tripadvisor is so far the only company heavily invested in this market.
That is part of the reason that Tripadvisor is his only Outperform-rated stock of the group, with a $35 price target. He initiated coverage of Booking with an Underperform rating, with a price target of $1,720, and Expedia at Market Perform, with a $113 target.
With the shares of all three having recovered from their lows, Clarke warns that the stocks are “currently being valued on past glories not future realities …with only Tripadvisor offering any reopening upside.”
While Booking (formerly Priceline) has historically been the strongest performer of the group, he warns that its heavy exposure to lodging means that it will likely suffer the most.
Expedia is facing the same headwinds, but it can offset this to a degree with its business-to-business flight revenues and cost savings.
He’s more upbeat on Tripadvisor because of its ability to leverage experiences, “the final frontier of travel, where it leads,” even as
Google cuts into its core metasearch business.
Booking was up 1.7%, to $2,062.66 in trading Tuesday, and has gained 0.4% year to date; Expedia was 1.2% higher, at $125.98 with a 16.5% rise in 2020; Tripadvisor was up 5%, to $27.40 and is down nearly 10% year to date.
Write to Teresa Rivas at [email protected]