Is Priceline Ready for Takeoff?

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Shares of online travel giant (NASDAQ: PCLN) have taken investors on a wild roller coaster ride over the past twelve months, bouncing between a low of $448.13 and a high of $774.96. The stock surged 20% between October 25 and December 3 after numerous analysts turned bullish on the online travel booking service, best known for its advertisements featuring “The Negotiator” William Shatner.

After the stock stalled out around $610, however, several analysts downgraded the stock, stating that the bleak state of the European economy and the fiscal cliff gridlock in the United States could put pressure on the travel industry’s outlook for 2013. Airlines are also posting more competitive prices on their own websites to compete with discount booking services like Priceline, Orbitz (NYSE: OWW) or Expedia (NASDAQ: EXPE), while Google (NASDAQ: GOOG) is strengthening its Google Flights metasearch service, which could take down many online travel booking services in one fell swoop.

The European Problem

Priceline’s $135 million purchase of European travel service in 2005 has been its best investment to date. The acquisition gave Priceline access to many of Europe’s smaller, independent chains and operators. Prior to acquiring, Priceline only posted $10 million in annual profit, while today its profit exceeds $1 billion. During this time, overseas revenue rose 68% at a compounded annual rate. There’s no question that was Priceline’s primary growth driver over the past seven years.

However, this growth came at a price. As Priceline expanded into Europe, it became increasingly dependent on the continent for its core revenue. Last year, the company generated 82% of its $7.8 billion in gross bookings from international markets, with Europe taking up the majority of these bookings. International sales soared 30% last year, compared to 7% growth in the United States. Most of this revenue growth came from hotel bookings, despite the company’s reputation for providing low-cost airfare.

Despite continuing to post strong year-on-year growth, analysts are increasingly concerned that Priceline’s exposure to Europe - which still cannot repair itself after three years of crises - will eventually slow down its international growth.

Can Priceline Paddle Out of Google’s Moat with a Kayak?

Enter Google - which has a habit of crashing the party in industries it did not create. Ever since Google’s controversial purchase of ITA Software in 2010 - the travel search system used by Priceline, Kayak, Orbitz, American Airlines and United Airlines to search and match air tickets - Google has been working on its own airfare metasearch site - Google Flight. Google Flight is aiming to become an all-in-one site that aims to replace individual online travel booking sites - similar to the way it usurped Internet search portals Yahoo!, Altavista, Infoseek and Hotbot in the late 1990s. To Google, ITA Software is but another piece of the company’s massive moat, but to online travel booking services, it is a massive threat to the entire industry.

Priceline’s defense against this rising threat is Kayak Software - which it recently purchased for $1.8 billion. Kayak is a metasearch site which combs through other sites in order to find the best price, similar to the mechanics of Google Flight. Kayak does not sell any tickets on its own.

Obtaining Kayak will also help Priceline offset its domestic weakness, since Kayak generates nearly 80% of its revenue domestically.

Priceline Finds a Friend in the Far East

With Google breathing down its back in the United States, and bearish analysts casting doubt on the company’s European growth prospects, Priceline has wisely expanded its interests in Asia. In August, Priceline allied with (NASDAQ: CTRP), the largest travel booking site in China, to mutually share search results. This gives Ctrip access to’s 235,000 worldwide hotels, and shares Ctrip’s Chinese hotels with and Priceline. Priceline’s agreement with Ctrip can be seen as a direct response to Expedia’s acquisition of No.2 Chinese travel site eLong.

Priceline’s subsidiary Agoda, which it acquired in 2007, is also steadily growing into the of Asia, with offices in Singapore, Thailand, Malaysia, Japan, South Korea, The Philippines and China.

Analysts forecast that China will surpass the United States as the world’s largest travel market by 2020, with an estimated $277 billion market. By then, 22% of global traffic as well as a third of the world’s travel spending will originate from the Asia-Pacific region.

Fundamentally Cheap

Although some technical analysts believe that Priceline could drop to $590 per share, further downside is limited. The stock is fundamentally cheap, trading at 16.7 times forward earnings with a 5-year PEG ratio of 0.99. While macro worries persist, Priceline’s business decisions have been wise, shrewd and defensive. Once Europe recovers, its business will work in tandem with its booming Asian business to generate strong simultaneous revenue growth on both sides of the globe.

Analysts on average expect the company to post annual EPS growth of 278.5% on revenue growth of 120.7% this year, far above the previous year's EPS growth of 54.6% on revenue growth of 24.1%.

leokornsun has no positions in the stocks mentioned above. The Motley Fool owns shares of International, Google, and Motley Fool newsletter services recommend International, Google, and 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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