NEW YORK (CNN/Money) -
Online travel giants are ratcheting up their spending to attract more customers. And that has Wall Street worried.
"2004 is setting up to be the year where the leaders in online travel are going to establish themselves. And the way they will have to do it is by promoting their brand, spending on marketing," said Peter Mirsky, an analyst with Oppenheimer.
More about online travel
|
|
|
|
InterActive (IACI: Research, Estimates), which owns industry leading online travel sites Expedia and Hotels.com, reported a better than expected first-quarter profit Monday. But the stock fell 3.7 percent that day due to lower than anticipated profit margins in its travel business. Analysts attributed the margin erosion to rising marketing expenses.
The company did not disclose exactly how much of an increase there was in travel specifically, but overall marketing expenses increased 63 percent from a year ago. And InterActive's travel business accounted for more than a third of total sales and nearly two-thirds of operating profit before amortization. InterActive also owns the Home Shopping Network and Ticketmaster.
Two other major online travel stocks reported earnings this week and also disclosed sizable increases in advertising expenses.
Priceline.com (PCLN: Research, Estimates), primarily known for its name-your-own price concept, is trying to diversify to compete with other online travel sites that allow customers to choose specific flights and hotel rooms. Its advertising expenses rose 39 percent from a year ago. (Paying Leonard Nimoy in addition to William Shatner must be costly.)
And Orbitz (ORBZ: Research, Estimates), the online travel company that went public late last year, said Wednesday morning that its marketing expenses increased 44 percent from the same period last year. Even though Orbitz posted a profit that surpassed Wall Street estimates, the stock dove nearly 7.5 percent.
The other major online travel company, Sabre Holdings (TSG: Research, Estimates), the owner of Travelocity, did not breakdown its marketing expenses when it reported earnings last month. Overall operating expenses increased 7 percent from last year.
Cheap fares but not cheap stocks
So the big question facing investors is whether the increased spending money well spent.
The memory of failed e-commerce companies such as eToys and Pets.com that spent heavily in a so-called Internet land grab at the height of the bubble is still fresh in many investors' minds.
But of course, companies like eBay and Amazon.com are proof that strong brand recognition is key to success.
* as of May 4, 2004 | Source: Thomson/Baseline |
|
Mirsky said that InterActive's marketing expenses, while significant, are necessary to clearly establish Expedia and Hotels.com as market leaders.
Still, there are other worries facing the online travel companies. In addition to spending more on media campaigns, consolidation is heating up and history has shown that acquisitions are often risky.
InterActive has been extremely aggressive, most recently buying Hotwire last year. And Priceline announced Monday that it is purchasing a majority interest in Travelweb, which sells discounted hotel rooms online.
Steve Weinstein, an analyst with Pacific Crest Securities, said that profit margins in the hotel businesses of these companies are starting to come under pressure, as the big hotel companies seek to get a bigger cut of revenue from online room bookings.
This is a cause for concern since the hotel side of the business has tended to be a more stable and profitable business than selling airline tickets, Weinstein said.
With that in mind, investors may be beginning to question if the online travel stocks deserve their relatively lofty multiples.
InterActive, Priceline and Orbtiz all trade at 2004 price-to-earnings multiples in the low-to-mid 30s. Sabre is much cheaper than these three but Travelocity accounts for only about 20 percent of its sales.
And even though the online travel companies are still expected to post solid earnings gains in the near-term, Weinstein said doubts are creeping in about whether margins can go any higher. Hence, the stock price declines following the earnings reports.
"What is the ultimate profitability? If you have any negative trend in a major component of the business, it's going to be difficult to find buyers for the stocks," Weinstein said.
Oppenheimer's Mirsky owns shares of InterActive but his firm has no investment banking relationship with it or other stocks mentioned. Pacific Crest's Weinstein does not own shares of any of the companies mentioned and his firm has no investment banking relationship with them.
|