PTVL article from Thursday in www.wallstreetcity.com
Internet Stock Watch
Preview Travel: Internet Leader Overlooked?
by Chris Connor
wallstreetcity.com
Preview Travel {PTVL} is a leading provider of on line travel services for leisure and small business travelers. It offers one stop shopping for airline tickets, vacation packages, car rentals, hotels and cruises. Preview Travel's trained travel agents provide customer service 24 hours a day, seven days a week by a toll-free number and email. Preview Travel has shown that offering these services can attract a large community of members. The company boasts more than 8 million registered members and that number grows substantially every quarter.
The On Line Travel Industry
To get a good sense of the potential of Preview Travel, it helps to get a better understanding of the on line travel industry. Forrester Research, Jupiter Communications, Travel Industry Association (TIA), and PhoCusWright are leading sources of information about the on line travel industry. Here is a collection of data from those sources that will give the investor a sense of the potential of the whole industry and its leader, leader Preview Travel, in particular:
• On line travel revenues will grow enormously over the next five years as computer users discover the joys of booking travel on line. Internet users booked $276 million in travel on line in 1996 - including air travel, hotel rooms, car rentals and other travel products. In 1997, sales tripled to $827 million, and by the year 2002 the size of the online travel industry will top nearly $9 billion.
• Air travel represented 84% of all online travel revenues in 1997, at $777 million. While this dominance should abate as online hotel and car segments grow, air travel is still expected to grow to $4.3 billion in 2000 and $7.1 billion in 2002. Car reservation revenues, generating just $44 million in 1997, are forecasted to grow to half a billion dollars in 2000 and $1.4 billion by 2002.
• Analysis of the Travel Industry Association of America's historical data reveals three segments that comprise the heart of this market: travel rookies, family vacationers, and seasoned veterans. Collectively, these groups account for 61% of all consumers who book travel on line.
Travel rookies - 8.9 million households comprised of 25-to-34 year-olds who earn between $35,000 and $100,000 annually. These young travelers will take more than 42 million leisure trips in 1998 -- more, per capita, than any other segment -- but spend less per trip.
Family vacationers - These 10.5 million 35- to 44-year-olds will take 48 million leisure trips in 1998. This group represents just 10% of U.S. households but accounts for 26% of consumers who book travel on line.
Seasoned veterans - These 7 million households, with travelers 45-54 years old, have household incomes of more than $75,000. This is the smallest of the segments, but will take 30 million leisure trips in 1998 and spend on average 33% more per trip than the travel rookies.
Impact of On Line Travel Booking
• Traditional travel agencies will take a hit. Mom-and-pop agencies with few corporate clients will be the first casualties of the on line leisure booking boom. The rise of e-ticketing and the surge in irritating $15 fees to book air travel will cause even the most loyal customers to flee to the net.
• On line travel agencies get more business. American Airlines, Marriott, etc. will enjoy a short direct-booking boom because consumers trust large suppliers, but by 2001, consumers will leave the comfort of suppliers for the comparison shopping benefits offered by online travel agencies with rich destination content.
• Once they try it, they like it: Online travel buyers are almost unanimous in saying they're satisfied with the online purchasing experience. 99% of respondents who've bought airline tickets online say they were satisfied or very satisfied with online purchasing experience.
Best in On Line Travel Category
Preview Travel was ranked as the number one Internet travel service by Gomez Advisors (Summer '99). The company is also the primary travel service on America Online, Excite, Lycos, Snap, and USA Today's web site. These relationships give Preview Travel a competitive advantage in this increasingly competitive industry. These relationships also help it to sell more advertising than any other travel site. Even though PTVL is losing money right now, its gross margins are on the rise. Gross margins improved to 67.2% in the second quarter compared with gross margins of 54.1% in the second quarter of 1998 and 62.5% in the first quarter of 1999. Preview Travel has improved its gross margins because it is now spreading its fixed costs of service and fulfillment over more transactions. Preview Travel also cuts costs better than most of the other companies in the travel industry. In the first quarter, the company's fulfillment rate was around only $8.20, while the average "brick and mortar" agent's cost is approximately $23 or $24 to fulfill a ticket.
Furthermore, the company has a lot of room to grow. Its member base spent more than $7 billion on leisure travel last year, but they booked only $200 million of it with Preview Travel. The company could stop courting new members and still have enormous growth potential. This member base should make Preview Travel a great takeover candidate for a travel company that needs to expand its business on line.
Risks
The biggest risk facing Preview Travel is that it is not expected to turn a profit until 2001. Preview Travel is losing money right now because it is hiring additional people to generate more ad revenue. The company plans to continue spending money on advertising and marketing to maintain its position among the on line travel brands. Preview Travel's method of recording revenues differs substantially from other travel companies' practices. Preview Travel's methods seem sensible, but other on line travel companies' practices apparently have more appeal for Wall Street. For example, other online travel-related companies, like Priceline, book the ticket price, not the commission as revenue. Thus, this method of accounting inflates those companies' revenue figures. On the other hand, Preview Travel records only the commissions and ad revenue as revenue - not the whole ticket price. In the first quarter, Preview Travel sold twice as many travel packages as Priceline, yet Priceline showed $40 million in revenue because of the way it booked them.
This accounting issue is not the only difference between Priceline and Preview Travel, and the way the market values each company is perplexing. Priceline has a market cap of close to $10 billion and is selling at a whopping 38 times sales, while Preview Travel has a market cap of only $233 million and is a relative steal at a price of only 11 times sales. If Preview Travel recorded revenue like Priceline.com, that price to sales ratio would be even smaller. The bottom line is that Wall Street does not perceive Preview Travel as an Internet powerhouse like Priceline, despite the fact that Wall Street analysts predict 56% annual EPS growth over the next 5 years for Preview Travel.
Investment Summary
Preview Travel could represent a great way to invest in the booming online travel industry. PTVL deserves the investor's consideration because it has a strong relationship with AOL and other leading portals; it is one of the top 50 internet sites; it is number one in travel sites; it boasts strong gross margins, and it has lots of room to grow. In the short term, the stock should have some upside due to its depressed price in the context of the recent Internet sell-off. Moreover, the company recently announced that it is the first on line travel site to surpass five million monthly unique visitors. Over the long term, Preview Travel could be a worthwhile e-commerce stock for investors who missed out on Internet high-flyers like Amazon.com and eBay.
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