Priceline: Driving on the Acquisition Strategy
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Priceline (NASDAQ: PCLN) is operating successfully from the last fourteen years in a highly cyclical travel industry. The stock tumbled down ~16% in Aug. 12 on concerns of Europe’s macro environment and currency fluctuations. I consider the risk to be small looking at the company’s long haul prospects in terms of fundamentals and valuation basis. Taking the performance of its peer comparisons into account, Priceline is ahead of Orbitz (NYSE: OWW) and Expedia (NASDAQ: EXPE) with a PEG ratio of a perfect 1 and a growth in its stock price.
Source: Yahoo! finance
Priceline’s growth is driven by its strategic acquisitions, which have helped it to expand its presence across underutilized geographies and give it a competitive advantage over its peers. Going forward, I believe that these acquisitions will further fuel its growth in Agoda (Asia), Booking.com (Europe) and Carrentals.com (Europe) and recently Kayak.
Key long term factors for growth
Priceline acquired Bookings.com in 2005, and since then it has grown at unprecedented levels. It has increased from ~20,000 in 2005 to over 235,000 by the end of 1H12. It has increased its footprint to 180 countries and supports 41 local languages, as compared to only 5 local languages and a only dozen countries in 2005. Booking.com dominates in the European region, which also gives it an opportunity to utilize its offerings internationally. It uses the agency model for hotels sign up.
Its Agency model is simple to use: Priceline acts only as an agent and the suppliers set the rates, which Priceline earns a commission on. Also, Booking.com shows a preview of the hotel property so that the guests can be satisfied of the price being paid by them. It can be noted that Booking.com is the third largest advertiser on Google’s site, giving a big hand in sales and web traffic. Additionally, its innovative mobile app (launched in 2011) ‘booking approach’ has given consumers a user-friendly way to book 41,000 destinations with 240,000 places to stay. It currently has 10 million mobile users.
Priceline acquired Agoda.com in 2007 in an effort to conquer the Asia-Pacific region. Like Booking.com it is a focused service of hotel bookings. Agoda.com uses the merchant model for hotel bookings, where revenue margin is generally higher than the agency model. Under this model, Priceline negotiates the price set by suppliers and earns the difference between the price offered and paid by the travelers plus the commission on rates. Agoda’s service has increased to 37 languages from 12 languages earlier in 2007.
With Kayak’s acquisition, Priceline will get the advantage of its well-established U.S. market and its useful tool that allows consumers to compare prices online with the other sites. Kayak’s integration will be beneficial for Priceline with its search rankings, and add to online advertising for Priceline.
Summing up, Priceline has successfully integrated its acquisitions of Booking.com and Agoda.com, and is well on track to make full use of Kayak’s advantageous features. Priceline’s strategic moves of buying profitable and deep rooted brands have paid in improved product and revenue cycles. The premium and simplified services of Priceline’s leading brands Booking.com and Agoda.com ,such as flash sales, last minute bookings, and mobile apps have removed the complexities and made it a favorable brand. Furthermore, Priceline is a cash cow with a free cash flow of $1.25 billion in 3Q 2012, which it can further utilize for acquisitions and share repurchases. Hence, taking the long term view I believe the stock’s price will begin going uphill once more.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com. Motley Fool newsletter services recommend 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!