Priceline's Tremendous Opportunity

By Daniel Sparks - September 19, 2012 | Tickers: EXPE, GOOG, OWW, PCLN, TRIP | 0 Comments

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August was a difficult month for Priceline.com (NASDAQ: PCLN) investors. Priceline CEO, Jeffery Boyd, disappointed investors with some unsatisfactory year-over-year numbers:

• Growth in gross bookings of only 26.8%
• Revenue growth of only 20.3%
• International bookings growth of only 33%

It doesn't end there. Priceline.com's guidance for Q3 also came in below expectations:

• Year-over-year gross bookings growth of approximately 10%-18%
• Year-over-year international bookings growth of approximately 12%-20%
• Year-over-year revenue growth of approximately 9%-15%

Upon the release of this terrible news, the stock plummeted a whopping 16%. Could things be any worse for Priceline?

I hope you've sensed my sarcasm by now. If not . . . well, I don't know what to say to you. These numbers are not disastrous. They are not even disappointing. In fact, these numbers highlight a powerful story of a growing business, despite the fact that it incurs the majority of its revenue from countries that have been directly affected by European worries. Despite the difficult times in Europe, Priceline keeps raining increasingly more cash for shareholders.

Priceline's competitors pale in comparison

Below is a table of the year-over-year gross bookings growth in Q2 of two of Priceline's competitors:

Priceline stands out as the clear winner in gross bookings growth for Q2, despite economic headwinds in Europe.

Even more telling, Priceline has consistently outperformed both Orbitz Worldwide and Expedia in terms of revenue growth over the last 5 years:

PCLN Revenue Growth data by YCharts

Priceline even continues to outperform Expedia's disruptive spinoff, TripAdvisor (NASDAQ: TRIP). TripAdvisor recorded year-over-year revenue growth of 16% in its most recent quarter, compared with Priceline's 20.3%.

Priceline's Booking.com offers enormous opportunity
The story gets even better when we take a close look at Priceline's most valueable asset: Booking.com. Priceline's market-leading international hotel booking business represents 85% of the company's profits. More importantly, the Booking.com business model differs immensely from other travel booking companies.

Priceline's U.S. site, and rival travel booking site Expedia, sell blocks of rooms to merchant websites. Booking.com, on the other hand, uses an agency model in which hotels simply list their available rooms on Booking.com, paying commissions for booked rooms. This agency model is a better conduit for the network effect. And, indeed, it has proven its worth: Booking.com has the world's largest global portfolio of more than 235,000 hotels (and it's growing fast!). Its network effect offers a hotels the largest customer base and it offers travelers the largest network of hotels at competitive rates.

And a closer look at the specific story underlying Priceline's Booking.com for the most recent quarter paints an even brighter picture. Year-over-year, Booking.com booked over 39% more hotel rooms -- including 50% more hotel rooms in non-European markets. All this growth despite the tough times in Europe.

Threats are minimal
Yes, Priceline's U.S. site faces fierce competition, but remember that 85% of Priceline's profits come from Booking.com.  The only competitor with enough muscle to possibly push back the growth needle on Booking.com is Google (NASDAQ: GOOG), with its new Hotel Finder service. Investors should keep a close eye on that service to ensure it doesn't gain any significant traction, which could result in serious threats to Priceline's lucrative hotel booking business. Still, Priceline's network effect and already massive portfolio of hotels should keep competitors at bay and should prevent any sudden pitfalls resulting from competition.

The bottom line
With Booking.com's win-win network opportunity for both hotels and travelers, $2.5 billion in cash, and ROE of 50%, Priceline is well-deserving of its its $640 share price, which gives the company a free cash flow yield of 4%. And since it accounts for just 4% of worldwide hotel room bookings, Priceline's Booking.com is presented with tremendous opportunity. 

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