Is Buying This Stock a Good Idea?
Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Online travel website Priceline.com (NASDAQ: PCLN) is one company that is truly aware of the meaning of ‘ups and downs.’
The stock that had reached an all-time high of $990 before the Internet boom went bust plunged to a record low of as much as $6 after that. Since then, however, Priceline’s rise can be described as being nothing less than meteoric, managing to outperform not just the competition, but even the recent economic weakness.
The company recently posted stunning second-quarter results. The only question that remains is -- will the good times continue? Let’s dive a little deeper for the answers.
Beating the recessionary blues
The very fact that Priceline has managed to comprehensively beat economic weakness and posted a consistent increase in profits is in itself no mean feat. This is a company whose revenue increased a substantial 34% during 2008 -- a period when the recession was beginning to take hold. And in 2009, at a time when the very same recession had hit an all-time high, Priceline’s net income recorded an amazing growth of more than 50%.
But then, the one thing you need to remember is that this is a company that is synonymous with its famous ‘name your own price’ image. The strategy allowed Priceline’s network of airline companies and hotel establishments to market their unsold flight seats and hotel rooms at prices that were not publicly stated and dictated by customers. This tactic is likely to have worked immensely in favor of the company during the recession, when consumers became far more cost-conscious than before.
And if you think even further, this will again be an advantage for Priceline as the economic recovery tends to be slower than anticipated, especially in key markets such as Europe. In fact, for a large section of people in these regions, Priceline may be the only viable option whenever they would be thinking of taking a much-needed vacation.
In my opinion, the other very big benefit that Priceline enjoys is the fact that it serves as a one-stop shop for all the vacation-related needs that a consumer can think of. And that includes hotel bookings, air ticket reservations, and car rentals. Keeping this aspect in mind, Priceline’s string of recent acquisitions have truly provided it with an edge over the competition that includes Expedia (NASDAQ: EXPE) and Orbitz Worldwide (NYSE: OWW).
The gateway to Europe
Any mention of Priceline.com is incomplete without a reference to Booking.com, the former’s most strategic acquisition till date. In fact, Priceline’s amazingly successful show in an otherwise economically gloomy Europe can mostly be traced back to its Booking.com subsidiary. Booking.com has two main advantages -- one, it has the largest European hotel room inventory, and two, its commission rates are among the lowest among peers, making it a hot favorite of the region’s hotel industry.
At the same time, with Priceline having made the acquisition way back in 2005, when the very concept of online travel was in its infancy in Europe, it also meant that the company enjoyed the first mover advantage in this region. Cash-strapped online consumers simply loved the idea of heavily discounted hotel rooms and it’s obvious that they continue to do so. The result -- an overwhelming 92% of Priceline’s operating income is derived from its operations centered in Europe.
Other intelligent buyouts
2007 was another landmark year in the company’s history when it acquired Agoda.com, with an eye on expanding its hotel booking business in the Asian region. This was followed by the more recent buyout of another travel company, Ctrip, in 2012. Along with these, earlier acquisitions such as rentalcars.com have also provided the necessary impetus to the company’s business by making life easier for its customers.
At the same time, the one recent Priceline acquisition that's really worth looking forward to is that of Kayak Software, an online travel-search aggregator. The concentrated travel-related information that Priceline can derive from Kayak will not only serve to increase the flow of traffic towards its website, but will also provide the former with a distinct edge over the competition. In fact, the enormous potential of such a move has now dawned on its rivals as well, as Expedia has also acquired a major stake in a similar German site, Trivago.
What’s happening at the other end?
Speaking of Expedia, the company is certainly going through a rough patch at present, with shares plunging a substantial 27%. This was largely triggered by its dismal second-quarter show where company's top and bottom lines failed to meet Street expectations. Expedia simply hasn’t been able to match up to the scale of Priceline’s investments, a large section of which is aimed at bolstering the latter’s presence in the U.S. market.
And as far as the traffic-related issues that Expedia is facing with TripAdvisor are concerned, it only serves to highlight the fact that the company failed to innovate in its efforts to tap more online consumers. But then again, Expedia cannot get away by blaming it all on the macro economic scenario, as evidenced by the results posted by smaller peer Orbitz, which actually seems to be doing quite well.
Orbitz’s second-quarter revenue went up in line with Priceline, as the results reflected a consistent rise in online hotel and vacation package booking. The company has also raised its revenue outlook for the full year, and noted that consumers were increasingly booking holiday packages and hotel rooms through their mobile devices, a fact which might work in favor of Priceline as well. All these point to the fact that the online travel market is really doing quite well now and the trend is likely to continue in the near future.
Priceline’s intelligent acquisitions and strategic investments do seem to have paid off in a major way. As far as the near term is concerned, the strong trend of summer bookings as claimed by its management speaks of good times ahead.
However, as I said in the beginning, it’s the lure of getting travel-related bookings at customer-dictated prices that’s going to be the deciding factor in favor of Priceline, especially in times of economic hardship when people have less cash to spare. And it works even better when the times are good, as there’s no dearth of bargain hunters. That apart, the next big play will be in Asia, and the company’s success in this region will indeed be a crucial factor.
But, the good thing is that Priceline has now increased its focus on the Asian region, realizing its immense potential.
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Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of 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!