Is AirBnB A Real Threat To Priceline Stock?

  • Priceline shares have been moving lower after Duetsche Bank downgraded them citing the threat posed by AirBnB.
  • AirBnB and Priceline's Booking.com home rental unit however serve different markets.
  • The kind of threat AirBnB poses to Priceline is not a direct one but a more subtle one that involves providing people with an alternative to traditional hotels.
Is AirBnB a threat to Priceline

Shares of leading OTA Priceline (NASDAQ: PCLN) have been trading lower after Deutsche Bank’s Lloyd Walmsley downgraded the shares to Hold and cut his price target by $100 to $1,325. Walmsley pointed to the threat AirBnB poses to Priceline’s Booking.com home rental units. Though the new PT is still 15% above current price, the downgrade raised a genuine concern regarding the competitive threat posed by AirBnB to OTAs.

Also see: Our Priceline Stock Analysis Video

How much of a disruptive threat is AirBnB to Priceline?

AirBnB: A Big Threat to HomeAway

To answer this question, let’s have a peek at how AirBnB has disrupted another erstwhile high-flying home rentals company. AirBnB is probably largely to blame for the drastic slowdown in growth at HomeAway (NASDAQ:AWAY). The company nearly doubled its home listings in 2014 to close to a million units just a shade below HomeAway’s reading, up from 550,000 at the beginning of the year.

AirBnB

Source: TechCrunch

In comparsion, HomeAway saw its paid listings grow just 17.3% during the year. During the first quarter of the current fiscal year, HomeAway saw its top and bottom lines take a drastic hit—revenue grew just 12.3% while EPS increased (21.4%). Compare that to fiscal 2014 when top line growth checked in at a much healthier 28.9% while EPS grew 23.4%.

When AirBnB broke into the home rental scene in 2008, it was not viewed as a real threat to HomeAway simply because it served the lower end of the market where customers needed shorter stays and plenty of flexibility. For instance, AirBnB customers will book a residence, or a room in a house, for just a few days. HomeAway on the other hand served well-established markets which provided a predictable experience.

Another big difference between the two home rental companies was how they did business with their clients. AirBnB relies on the performance-based listings model where homeowners and clients only pay when they check into a residence. HomeAway, on the other hand, traditionannly favored a subscription-based model where homeowners pay a predetermined fee at the beginning of each year regardless of whether their properties get occupied during the year or not. Though HomeAway recently launched a performance-based booking model, it charges homeowners 10% of rental amount compared to just 3% by AirBnB. The flexibility of AirBnB’s operations is probably what has been firing its frentic growth.

Though HomeAway CEO Brian Sharples has in the past said that the two companies serve discontinuous markets with just a 6% overlap, that might not be the case anymore. It’s hard not to at least suspect that HomeAway’s sudden slowdown in growth is being orchestrated by AirBnB’s overwhelming presence in the space. Moreover its pretty common to see people cross-listing their properties on both sites. This tells you that many homeowners do a lot of comparative analysis between both sites.

But, Booking.com’s home rentals unit operates quite differently from HomeAway. Booking.com does business almost exclusively with property management companies as opposed to serving individual homeowners the way HomeAway does. The two markets are distinctive with the property management booking business having a market share of around 40% vs. 60% for individual homeowners. As things currently stand, therefore, AirBnB only poses a limited threat to Priceline’s home rental business.

But, this might soon change. Priceline recently cut a large distribution deal with HomeAway that will see about 200,000 of HomeAway’s inventory made available on Priceline’s Kayak metasearch engine. There are speculations that Priceline could be laying the foundation to soon acquire HomeAway. Viewed from this perspective, AirBnB might end up competing directly with Priceline in the event of a Priceline/HomeAway merger.

The threat that Lloyd Walmsley was probably talking about is not AirBnB competing directly with OTAs such as Priceline per se, but a more subtle albeit a real one. The rapid rise of home rental companies such as AirBnB might provide people with a different option from traditional hotels. If more people prefer to stay at rental homes rather than hotels, then OTAs such as Priceline and Expedia (NASDAQ: EXPE) might suffer. This is perhaps the kind of threat Walmsley was alluding to.

Note: You might be interested in our Expedia Stock Analysis Video.

Priceline derives close to 98% of its revenue from hotel and home rental bookings, with the rest coming from airline bookings and car rentals. The company does not break down how much of this comes directly from home rental bookings, though it’s most likely limited to less than 10% of Priceline’s revenue. Priceline guided for an anemic 0%-7% top line growth for the current fiscal year, which will turn out to be the lowest by the company since its IPO. How much of this is directly attributable to AirBnB is not clear as yet. Expedia, however, whose business is pretty similar to Priceline’s, is still growing at a healthy clip. Expedia and AirBnB are more dominant in the U.S. market whereas Priceline is more dominant in European markets making it less vulnerable to AirBnB than Expedia.

Bottom Line

The kind of threat that AirBnB poses to Priceline probably has something to do with the company offering people an alternative holiday destination and not direct competition with Booking.com’s home rental units. Whether or not AirBnB is directly responsible for Priceline’s slowed growth is debatable. PCLN shares are up just half a percentage point YTD, mainly on concerns regarding a slowing top line. Until Priceline can show the kind of vigor it displayed a few years back, the shares are likely to remain depressed. Sell Priceline Stock.

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