How travel giants are retaining confidence of investors

The Priceline Group and Expedia Inc. are tipped for another strong year ahead, according to two independent financial analysts.

Writing for SeekingAlpha, Gary Alexander’s evaluation of Priceline Group and The Reasonable Investor’s evaluation of Expedia Inc. both point to future growth spurred by the continual adoption of online booking by more travelers across the globe.

The optimistic outlook comes despite recent wobbles in the public markets for the pair during the last few months of 2017.

Alexander cites Priceline Group’s strong growth in the first three quarters of 2017, with total revenue up 18% over the same period a year earlier to a total of $9.9 billion.

Hotel room bookings are driving that growth, up 19 percent year-to-year to 177.5 million nights in Q3.

That growth, coupled with what Alexander calls "best-in-class margins" - the company currently trades at a relatively low 23x forward price-to-earnings ratio - and valuation below other OTAs create a favorable outlook for Priceline.

He predicts the stock will hit $2,000 per share early this year. Looking ahead he cites Priceline’s diverse capabilities through Kayak, Booking.com, Rentalcars.com and OpenTable that put it in a strong position to capture online bookings across a broad spectrum.

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The Reasonable Investor’s analysis of Expedia is not quite as strong but still predicts the company is worth $19.5 billion, or $125 per share, assuming a discount rate of 10% and a terminal growth rate of 2%.

Using a more aggressive terminal growth rate of 3% increases the target price to $134.

The analyst estimates the majority of the company’s value - a whopping 78% - comes from hotel bookings (the category of "car rental, cruises and others" is the next largest at 8%).

Interestingly, both travel giants spend massive amounts on Google paid advertising (clocking in at around $8 billion between them during 2016), yet the reliance on such a model causes concern only for The Reasonable Investor.

While it predicts a decline in revenue margins on hotel bookings - from 17% in 2016 to 14% in 2023 - it believes it will be offset by increases in the average daily rate per room and total number of rooms available.

Of note, there is potential for substantial growth for Expedia (and its competitors) with travelers from outside the United States and Canada. Regions such as Asia-Pacific and Europe have larger travel markets but smaller percentages of the online travel segment.

And similar to Alexander’s take on Priceline, The Reasonable Investor points to Expedia’s existing network of online entities that position it to capture these unrealized travelers.