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3 Reasons to Avoid Travel Stocks in 2020

For years, travel stocks were some of the best bets on the market.

For much of the last decade, stocks like Booking Holdings (NASDAQ: BKNG) and Expedia (NASDAQ: EXPE) surged, consistently outperforming the market as the travel industry shifted to the online booking model for hotels, flights, and rental cars. The chart below shows how those two stocks have performed over the last decade compared with the S&P 500.

BKNG data by YCharts

More recently, however, these stocks and others like TripAdvisor (NASDAQ: TRIP) and Trivago (NASDAQ: TRVG) have stagnated as industry dynamics have changed and growth has slowed.

Trivago's recent earnings report, which caused the stock to plunge by double digit percentages, makes clear the challenges the industry faces over the coming year and beyond. Among the issues management noted were the growth of Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google, the threat of the coronavirus, and the maturity of the industry and its subsequent slowing growth. Let's look at these three factors.

Image source: Getty Images.

1. Google wants a bigger piece of the pie

Google is the leading search engine in much of the world. It's built a $1 trillion company by leveraging the advertising demand around billions of search queries, and that position gives it enormous market power when it chooses to move into a new industry.

Google already makes billions selling travel ads, including those from online travel agencies (OTAs) like Expedia and Booking, but over the past few years, the search giant has gradually made a bigger play for travel search directly. It introduced a redesigned hotel search page in October 2018, and launched Google Travel last May, a one-stop site for hotels, flights, and vacation packages. Meanwhile, Google has also found ways to coax more ad dollars out of OTAs by pushing free travel listings lower down on the search page.

In its letter to shareholders, Trivago assessed Google's position by saying, "Google has invested into its own hotel meta-search product, trying to capture more of the value in the industry and grow its profit base," and, "Google is likely to continue to try to increase its share of total industry profit."

So far, established OTAs haven't found a way to stop Google, and its position as the place internet users usually begin a search gives it a key advantage. So the search giant is likely to grab more market share and profits in 2020 as it makes a bigger push for the online travel market.

2. The coronavirus outbreak

Uncertainty still surrounds the coronavirus outbreak, which has killed more than 1,000 people and infected more than 40,000. No one knows how deadly the epidemic will be, or how long it will last, but its impact on business has already come into focus.

In travel, the virus has been problematic for the cruise industry, leaving one ship in Japan quarantined, and has forced other travelers to cancel trips to China. Unlike some industries, hotels and airlines operate with a time-based inventory, so a trip canceled today doesn't generally lead to a trip at another time. That's money lost that isn't coming back.

In its shareholder letter, Trivago acknowledged that the coronavirus would hurt its business this year, especially in Asia, and that the impact is likely to be similar across all travel stocks that do business in Asia.

The virus will also hurt Chinese tourism in places like the U.S. and elsewhere, because China, with the world's biggest population, has become a significant driver in the global tourism industry. Chinese tourists spent $34.6 billion in the U.S. in 2018, a figure that's likely to decline this year if the coronavirus persists.

3. A maturing market

Online travel was at one point a disruptive industry. In the days before the internet, travelers would often have to rely on an agent to book a flight or a vacation package, and the disruptive impact led to rapid growth in the early days for companies like Booking and Expedia as they recruited more and more hotels to list on their platforms. But more recently, revenue growth has slowed as the market has matured and new competition has come in. In addition to Google, Airbnb and other vacation rentals sites have shifted the market, as have newer hotel-booking sites like HotelTonight. Meanwhile, the white-space opportunity in finding hotels to list through online travel agencies is much smaller than it was earlier in the industry's history.

The chart below shows how revenue growth has slowed for all of the major domestic online travel stocks.

BKNG Revenue (Quarterly YoY Growth) data by YCharts.

Early in the 2010s, companies like Booking regularly had revenue growth in the 20% or 30% range. Now single-digit growth or even negative growth has become the norm in the industry.

In its letter, Trivago management noted that industry growth had slowed, which it said was leading OTAs to focus more on profitability than revenue growth. That type of transition is typical for a maturing industry. When industry revenue growth is high, companies tend to spend aggressively on marketing to capture that growth. As revenue growth slows, profitability becomes more important, which generally leads to slower growth in marketing or even a decline in the demand driver, as has been the case for Trivago recently.

Some of these travel stocks may be able to outperform expectations this year since they don't necessarily trade in tandem and each has its own strengths and weaknesses. Nonetheless, challenges are mounting for the industry as a whole, and that means the high-growth days of old are likely over.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Booking Holdings, and TripAdvisor. The Motley Fool recommends Trivago. The Motley Fool has a disclosure policy.


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