Vicious Spending Cycle and Lower Growth Forecasts Hitting Travel Stocks

Investors marked down US online travel companies last week after being disappointed by a series of high-profile results that failed to meet expectations (spiralling costs the dominant feature) and softer than expected forecasts. It’s tough out there.

TripAdvisor was probably the major disappointment for investors, the company spending like a drunken sailor with costs rising 58% year on year (sales and marketing was up 64% to USD159m).

No surprise this impacted the bottom line and TA slashed its EBITDA profit forecast growth for the full year to the low 20% range. Three months ago it was in the high 20s to low 30s.

Holiday rental site HomeAway shares also lost ground and most recently traded at USD29.21, well of its 12 month high of USD48.90.

This was despite CEO Brian Sharples claiming: “We’ve had another great quarter, once again delivering strong financial results”.

Once again cost blowouts engendered negative sentiment.

No surprise sales and marketing played a leading role, up 47% to USD42.2m. while operating income for the quarter fell from USD12.8m to USD11.3m year on year.

Meanwhile, Priceline’s share price followed the market and fell – mostly due to a conservative outlook – but overall the company performed strongly.

It may spend a bomb on marketing but does not waste money, ensuring every dollar spent drives revenue across its brands, which include Booking.com, Agoda.com, Priceline.com.

The numbers however are staggering.

In the September quarter Priceline spent AUD857m on marketing – AUD700m of it online – and its spend for 2014 has already breached USD2bn.

If year on year growth continues at present levels, about 25%, Priceline will spend more than USD3bn on sales and marketing this year.

No wonder smaller rivals like Orbitz, where marketing costs grew 26% to USD92.4m for the quarter, are struggling.

Like other companies, sales and marketing spend at Orbitz is growing much faster than revenue, but what choice does it have?

If Orbitz doesn’t spend it gets left further behind and it’s a vicious cycle many online travel companies now find themselves in.

Clearly though this sort of spending/revenue imbalance can’t go on forever.

Companies will go broke if it does, yet there is no end in sight.

Something has to give. The question is when?

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