Go Places With These Online Travel Stocks

With summer on our doorstep, companies across the globe are gearing up for what's poised to be one of the busiest travel seasons in years. According to the U.S. Travel Association, total travel expenditures in the U.S. should top $1.01 billion in 2017, up from $971 million in 2015, with much of that spend coming during peak travel periods, such as in the summer. The travel and tourism industry should also see good year-over-year gains, with the association predicting total expenditures to reach $1.14 billion by 2020.

While many sectors stand to profit from increased tourism, one that stands to benefit more than others: the online travel industry.

You might think everyone already books their travel online, but, in fact, less than half of all travelers pay for their hotels, flights, and car rentals via the web, says Dan Wasiolek, a senior equity analyst with Morningstar. The travel booking market is about $1.3 trillion in size, he says, but only 40% of that is generated through online bookings--the rest is done by phone. Out of that 40%, just 40% is booked through online travel agencies, like

Every year, though, an increasing number of people are reserving online. Statista, a research aggregation site, estimates that global digital travel sales will increase by 44% between 2016 and 2020, and online travel agencies will certainly be big a beneficiary of those gains. According to Fidelity Investments, only about 50% of travelers in the U.S. book online, 25% are doing the same in China, and even fewer are using online travel sites in India--all massive markets with plenty of growth potential.

With numbers like that, the investment opportunity in online travel sites is clear, says Wasiolek.

"It's a large industry, it's a growing industry, and you have opportunities to invest in critical scale leaders," he says.

More Hotel Rooms Mean More Business

Many investors have already clued into the industry's potential, with Priceline, Expedia and China's

"It's an attractive market," he says. "It doesn't require much in terms of physical infrastructure and it's a high return on equity business. There's potential to generate large profits."

For instance, Priceline grew revenues by 146% and gross profits by 234% between 2011 and 2016. Expedia also saw big gains, growing revenues by 154% and gross profits by nearly 100%. And many of these companies are making money across several different sites. Priceline owns Booking.com, the largest hotel and vacation rental site, and it also has a 15% stake in Ctrip, which is expected to see huge growth as more Chinese citizens start to travel. Expedia, meanwhile, owns Orbitz, Travelocity, and Trivago, all popular travel booking sites.

While growth will come simply from more people booking online, revenues are also being driven by more hotels offering rooms on these sites. Online travel companies make between 10% and 15% commission on the sale of a hotel room--they get a much smaller percentage on airline tickets.

"Hotels are a much more profitable business for them," says Karla. That's partly why Expedia and Priceline have spent millions advertising for their hotel sites, such as Booking.com and Expedia's Hotels.com. The former has about 25 million rooms for sale. Other higher margin lines of business, like restaurant and experience bookings, are being added to these sites as well.

No Sure Things As much potential as this sector has, the few listed companies in the space carry high uncertainty ratings from Morningstar. The Morningstar Uncertainty Rating represents the predictability of a company's cash flows--and therefore the level of certainty Morningstar has in its fair value estimate of the company.

Part of the reason for the high uncertainty is that travel is a cyclical business and revenues can rise or fall depending on economic growth and sentiment, says Wasiolek. During the recession, for instance, demand for travel dropped to its lowest level in history.

In addition, other companies could come in and steal market share from the incumbents, he says. Although

Airbnb is making some investors nervous, but the big players have made moves to counter the company's growing popularity. Expedia acquired Airbnb-like site HomeAway last year, while Booking.com has loaded up on nonhotel vacation rentals. Currently, Airbnb has about 3.5 million rentals, but Booking.com has 8 million, says Wasiolek.

"A lot of people don't realize (that these sites) have more than just hotels," he says. "They even have tree houses and teepees, all that kind of stuff."

Still, this market is only starting to heat up. According to Wasiolek's estimates, the overall online travel industry will grow by 9% annually over the next several years, but vacation rentals should go in the midteens.

"It's only a small piece of the market, but it's growing quickly," he says.

Paul Greene, manager of

The biggies are also savvy users of Google Adwords--they buy search words for various hotels and destination spots--and other companies would have to pay a lot money to bump Expedia and Priceline out of the top search site.

"Once someone has the lead and is execute well, it's very hard for others to catch up," he says.

Good Potential Ahead

Despite some of the risks, all the companies in this space have plenty of potential, says Wasiolek. Expedia and

"Priceline remains the best positioned company," Wasiolek says.

Recently, Morningstar increased Expedia's fair value estimate rose from $155 to $168 based largely on the potential for tax reform. Because Expedia's business has a larger U.S. presence than Priceline’s, it will benefit more from a corporate tax reduction. But it's also getting deeper into the vacation rental space, it's growing its hotel business, and it's expanding internationally.

"It's right behind Priceline in far as how it's positioned," he says.

TripAdvisor is a different kind of stock. It trades at a 30% discount to fair value as of this writing. It's not a pure booking site, per se. Rather, most people visit the site for its travel reviews--though users can book a room from the site via its Instant Booking option. However, sales of tours and attractions, vacation rentals, and hotel bookings are picking up. Investors just have to be patient for that growth.

"It's taking more time and more money to execute," he says. "But with about 150 million visitors per month going to TripAdvisor, it has an advantage."

Ultimately, though, it's hard to go wrong with any of these businesses, says Greene, whose fund firm, T. Rowe Price, is the largest shareholder of Priceline. These companies should continue seeing double digit year-over-year earnings growth, he says.

"There's a favorable backdrop for all the companies playing in the online travel agency space," he says.

Bryan Borzykowski is a freelance columnist for Morningstar.com. The views expressed in this article do not necessarily reflect the views of Morningstar.com.