Three Reasons To Buy This Innovative Leader

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the best ways to find stocks with superior growth potential is looking for those businesses which are redefining the way things are done in their industry. Innovation and disruption are in the main essence of economic growth, and Priceline (NASDAQ: PCLN) has built a remarkably profitable business by bringing online technologies to the travel booking industry.

1- A smart business model

Pricing has become a critical aspect for clients in the travel industry over the last years, and Priceline makes it much easier to look for the most convenient deals in hotels, plane tickets or car rentals. Some last minute deals can be spectacularly cheap, and that's a big advantage for clients.

But not only travelers benefit from Priceline. The service allows hotel operators, airlines and rental car companies to clear their inventory without damaging the brand value. When you are running a hotel or an airline, occupation is a key factor for profitability. The additional cost of one more guest in a hotel room which would be otherwise empty is almost irrelevant, so it makes a lot of financial sense to offer steep discounts if the room is going to be empty. The same goes for an unoccupied seat in a plane, or a car wasting time in the parking lot of a rental car company.

The problem with offering aggressive discounts is that the brand could get tarnished, and it then becomes much more difficult to convince clients to pay the regular price if they have got used to expecting big discounts. Doing it via Priceline, and under special conditions, companies get to clear their inventory by selling to bargain hunters while at the same time protecting the brand image.

This is a win-win situation for service providers and their clients. And for Priceline too, of course, since the company makes some juicy margins from this deals. Priceline has gross margins above 75%, and it keeps nearly 35% of its sales as operating profits.

2- Intelligent acquisitions

Priceline has made a series of acquisitions over the last years, including Booking.com in 2004 and Agoda in 2007. These transactions gave Priceline a fast entry into Europe and Asia, respectively, consolidating the business on a global scale and eliminating potential competitors.

More recently, Priceline announced the acquisition of Kayak for $1.8 billion, incorporating its popular search technologies and strengthening Priceline´s competitive position. The company is also expanding into China via a partnership with Ctrip.com, the leading travel agent in the Asian country.

Priceline understood early in the game that online travel is a very profitable business with plenty of growth opportunities, so it makes a lot of sense to invest heavily in order to gain market share while the industry is still young. In fact, the biggest risk for Priceline is competition, so management is not only buying growth prospects with these deals, but also eliminating competition in a very promising line of business.

Priceline has managed to outgrow its biggest competitor Expedia (NASDAQ: EXPE) by a considerable margin over the last years, and international expansion via acquisitions has been a big factor behind this superior growth. Bigger market share for Priceline versus Expedia also means better alternatives for its users, and a more attractive partner for the service providers.

 

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Google (NASDAQ: GOOG) has launched different travel products over the last years, and this is a threat to watch since the online search engine has enormous amounts of financial and strategic resources at its disposal. Although Google is not likely to get involved at the transaction level, it does have the potential to hurt Priceline in search and other areas.

At this stage, however, Priceline is the undisputed leader in the industry, and it has the early start advantage.

3- Fair valuation

Priceline is trading at a P/E ratio near 25.5, which is not unreasonably expensive for a company which has increased earnings per share at outstanding speed over the last years. On a historical perspective, Priceline is trading in line with its past valuation, so the stock still offers plenty of upside potential if the company continues capitalizing its growth opportunities like it has done so far.

 

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Bottom line

Online travel is a very exciting and innovative business, and Priceline has achieved a leadership position via both acquisitions and organic growth. The company is remarkably profitable, and the price is not excessive at all. So buckle up and enjoy the flight, because Priceline will keep gaining altitude in the middle and long term.


acardenal owns shares of Priceline and Google. The Motley Fool recommends Ctrip.com International, Google, and Priceline.com. The Motley Fool owns shares of Ctrip.com International, Google, and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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