Why Priceline Should Consider Buying Its Online Rival TripAdvisor

NEW YORK (TheStreet) -- According to a recent Wall Street Journal article, Priceline's (PCLN) Chief Executive Officer Darren Huston said that he is open to exploring new acquisitions following the company's $2.6 billion purchase of OpenTable in July.

Considering the majority of Priceline's growth over the years has come from similar acquisitions such as Booking.com and Kayak.com, it would be fitting if the company pursued the increasingly popular online travel company TripAdvisor (TRIP) as a potential complement to its existing portfolio.

While Huston stressed that Priceline would be selective in any deals that it pursues, an acquisition of TripAdvisor would make the most sense given the company's breadth and the depth of its research. For example, as of the third quarter of 2014, TripAdvisor had nearly 200 million reviews and opinions on more than 4.4 million places to stay, places to eat and things to do. This includes more than 890,000 hotels and accommodations and approximately 650,000 vacation rentals, 2.4 million restaurants and 480,000 attractions in 145,000 destinations throughout the world.

Moreover, with nearly 315 million monthly unique visitors, TripAdvisor accounts for more than 10% of all global Internet traffic to travel-related websites. Approximately 50% of these visitors were using mobile devices like tablets and smartphones. So there are significant growth opportunities in this rapidly growing segment of the market -- especially through the company's other recently acquired apps, including Jetsetter, SeatGuru and GateGuru.

In fact, while speaking with CNBC's David Faber, President and CEO of TripAdvisor Steve Kaufer was quoted as saying "It's still Expedia (EXPE) or Priceline or a hotel chain or an individual property that we hope to power the transaction, so it's still those folks that are sending the confirmation email. They're still talking to them for customer service, but we want to make the experience just that much better -- be it on TripAdvisor on your phone or on your desktop."

Through either an all-out acquisition or a partnership, it would likely make sense for Priceline and TripAdvisor to consider an agreement. What's more, compared to rival Expedia, Priceline's significantly larger size and capital resources would make for a better partnership than before TripAdvisor's spin-off from Expedia in 2011.

Although TripAdvisor has hit some speed bumps recently -- mostly due to increasing costs associated with the company's transition to metasearch -- shares have been unjustly punished, falling from highs near $110 to current levels around $75.

Additionally, TripAdvisor's recent acquisitions of Viatour (which offers tours of local attractions) and La Fourchette (a European restaurant booking service) have also added to the company's recent higher costs. However, both acquisitions are expected to increase revenue and earnings growth going forward. In fact, in the most recent earnings results, Kaufer noted that the Viatour acquisition helped accelerate third-quarter total revenue growth.

Nonetheless, TripAdvisor has averaged revenue and free cash flow growth in the mid- to high-20% range over the past five years. Operating and EBITDA margins have averaged in the low- to mid-40% range.

While these metrics have shown some deterioration on a sequential basis in the most recent quarters, Kaufer continues to stress the fact that TripAdvisor is still a growing company and that he is focused on building that company in an effort to help over 300 million travelers plan and have a good trip.

Absent an acquisition or partnership with Priceline, TripAdvisor still has many catalysts over the longer term. These include the transition to metasearch, which yields higher quality clicks; recent acquisitions, which provide increased growth and a bigger user base; and the growth of mobile, with instant booking on its app and mobile site. A continued share repurchase program and increasing international growth also are positive signs.

For many of the same reasons, Yahoo! (YHOO) would also stand to gain from an acquisition or partnership with TripAdvisor -- especially as Marissa Mayer looks to put to work some of the proceeds from their Alibaba (BABA) stake while also fending off competition from Google (GOOG) , Facebook (FB) and others.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.


TheStreet Ratings team rates PRICELINE GROUP INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate PRICELINE GROUP INC (PCLN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

You can view the full analysis from the report here: PCLN Ratings Report

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