Hotel-booking site Wotif.com (ASX: WTF) suffered a 12% share price drop when it announced in December that first-half profit would decline from $27.5 million in FY 2013, to around $22 million in FY 2014. Similarly, Webjet Limited (ASX: WEB) shares declined after it forecast EBITDA for FY 2014 to be $21.5 million. In retrospect this was probably a good buying opportunity, as Webjet shares have since rebounded more than 20% from their lows. At $3, the share price remains well below the all-time high of $5.30, reached in FY 2013. Wotif shares remain close to all-time lows at under $2.70.
I tend to use the behaviour of my peer group as an indicator of the way people use the internet, because we're the first generation that grew-up with the internet. Asking around, I've discovered that many don't use Webjet and Wotif as much as they used to. The biggest reason for this is there is a vast array of other booking websites, and some of them are cheaper. Aside from online-only competitors, the pair also face competition from bricks-and-mortar travel agents like Flight Centre Travel Group Ltd (ASX: FLT) and Helloworld Ltd (ASX: HLO), the newly rebranded Jetset. Both companies now allow customers to book online: put simply, the list of online booking websites is getting longer.
It's bad news for Webjet that Skyscanner has hit Australian shores. The website is quickly gaining popularity because it doesn't charge booking fees, but merely diverts users to the website of the airline selling their selected flights (the airline may charge a fee). In comparison, Webjet charges over $30 for booking domestic flights, which is certainly in excess of the booking fees generally charged by the airlines themselves.
As Motley Fool contributor Regan Pearson writes, the way we book flights may be about to change, if Google Inc (NASDAQ: GOOG) enters the space. The CEO of Ryanair says that Google won't charge fees and will "blow comparison sites like Skyscanner out of the water." I'm not sure where that would leave Webjet.
The competitive situation is no better for Wotif. US booking website Priceline.com Inc (NASDAQ: PCLN) is promoting Booking.com in Australia, and it's fair to say the competition is having an impact. The Australian Financial Review reports that Booking.com has "surged passed Webjet and Wotif to report 5.3 million monthly web visits compared with 4.2 million for each of the local sites."
Wotif is also threatened by websites such as Airbnb, which allow ordinary people to offer their spare rooms as accommodation. Not only does this bypass Wotif, but it also challenges the assumption that travellers will stay in hotels or motels: my tip is that the change will hurt hotels generally, not just Wotif. For now though, the challenge for the Wotif.com, in the words of CEO Scott Blume, is to "leverage off a massive base… into other lines of business like we have with flights and package deals."
Foolish takeaway
I was once a shareholder of Wotif.com, but I sold when founder Graeme Wood sold down his holding at a little over $5. I'm increasingly concerned that the company is in secular decline and would only buy shares if this were reflected in the stock price. Webjet has rebounded about 15% since I said I preferred it to Wotif, and I can't pick between them at current prices. I acknowledge that the market is currently reasonably pessimistic about their prospects, and I share that pessimism to an extent. My personal opinion is that Priceline shares are a better buy, despite share price appreciation of over 70% in the last 12 months.
It is possible, however, that that the pessimism about Wotif and Webjet is overdone. Certainly, gloomy accounts of the companies' prospects are present in the mainstream press. This could signal that market sentiment has reached a low point. Wiser minds than mine may see this as a buying opportunity, and both companies have recently launched attractive package-deal options, which could significantly boost profits. In particular, Webjet's expansion of the Zuji and Lots of Hotels brands could drive profit growth for the company in the years to come.
