Goldman Sees 'Peak Travel,' Downgrades Priceline To Neutral, TripAdvisor To Sell

• Priceline Group Inc PCLN shares have lost 13 percent since December 28, while shares of Tripadvisor Inc TRIP are down 18 percent.
• Goldman Sachs’ Heath P. Terry downgraded the ratings and lowered the price targets for both companies.
• The online travel space is now facing crowding and competition, Terry stated.

Post recession, the online travel space has generated five years of robust growth. Analyst Heath Terry mentioned, however, that the environment for online travel agents is “becoming less favorable.” He cited the reasons for this as:

1. High occupancy and average daily rates, combined with below average late cycle supply growth, to “crowd out leisure travelers”
2. Suppliers encouraged by high occupancy rates, resulting in less favorable economics
3. An increase in penetration levels leaving less room for OTA share gains
4. Stiffening competition from alternative accommodation providers and traditional traffic sources

“While we believe there is still secular growth in the category as consumers continue to move bookings online, Millennial spend more on travel, and earlier stage Asian and LatAm markets grow, we believe investor expectations for OTA growth and profitability may prove too high, and “optimism” that softer business travel demand will favor OTAs, too early,” Terry wrote.

The analyst further commented that peak travel meant increasing challenges to growth.

Priceline

Terry downgraded the rating for the company from Buy to Neutral, while reducing the price target from $1,500 to $1,200. He cited a strong US dollar, stiff competition, and slowing growth opportunities as the main reasons for the downgrade.

“While we continue to believe Priceline is the best positioned given its exposure to faster growing Asia, lighter mix of large hotel chains and relatively attractive multiple, the stronger dollar and competitive environment will continue to limit outperformance, in our opinion,” the Goldman Sachs report noted.

TripAdvisor

The analyst downgraded the rating for the company to Sell, while reducing the price target from $68 to $59. TripAdvisor’s stock trades at a premium valuation, which is at risk due to decelerating growth. Revenue growth is expected to slow, with the company having to deal with the monetization gap created by the transition to Instant Booking [IB].

“While we believe a cost per acquisition based model like IB has the potential to generate incremental revenue for TripAdvisor over time, the lack of broad coverage, terms negotiated during a period of unprecedented supplier leverage, and conversion rate challenges from the dual track results consumers are presented with are likely to drive slowing revenue growth in the interim,” Terry wrote.

Growth and margin expectations are above what TripAdvisor should be able to generate, which puts both estimates and valuation at risk. “That said, we believe as a traffic asset TripAdvisor could be an attractive M&A target to larger OTAs,” the report added.