Priceline.com Likely to Maintain Strong Price Momentum

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Summary: Priceline.com’s stock has been on a strong uptrend in recent times. Many analysts have now upgraded this stock, and slated it to eventually break through the $1,000-psychological mark soon. A lot of Priceline investors are worried that the company’s stock could be  overvalued and risks facing a  severe market correction similar to the one it underwent in 2000 during the Dotcom Fiasco.

Priceline.com Inc. (PCLN) is ranked as the #1 OTA (Online Travel Agency) in the world today, in terms of market cap and online revenues. Priceline’s market cap of $45.47 billion is far above that of close rival Expedia’s (EXPE) $8.7 billion. The company operates through four main subsidiaries namely Priceline.com, Agoda.com, Booking.com, and RentalCars.com. Priceline offers its global customers services such as car rentals and hotel rooms reservations in over 295,000 hotels located in more than 170 countries worldwide.

Strong price momentum

Priceline’s stock has been on a strong uptrend recently; the stock has appreciated by more than 35% over the last 12 months, and a mind-boggling 1000% + in 5 years. Current share price stands at $908.36 with the one-year share price bracketed between $553.42 and $926.40. The stock is growing  more volatile, with a current beta value of 1.35 up from 1.25 two weeks ago. This stock has been receiving support around $879.46 during the past year and resistance around the $927.42 mark. Most Priceline technical indicators are currently bullish and the stock has received a 3 out of 5 stars hold rating by the S&P 500. The graph below shows Priceline’s share price movement in the past few months.

 

Many analysts believe that Priceline’s strong price momentum is set to continue and will eventually break the $1,000 mark, before even the likes of Google (GOOG), currently trading at $906.57, get there. UBS recently placed Priceline’s one-year price target at $1,035 while Jeffries Investment Bank thinks the stock will reach its ceiling around $1005.

In sharp contrast to analysts’ expectations, lot of Priceline investors are now worried that the stock could be overvalued and might face a major market correction like it did in 2000.Is Priceline.com actually setting itself up for a Tech 2.0 market correction? Is Priceline.com stock yet another bubble stock?

Is Priceline’s stock valuation in touch with reality?

For an investor to check whether a particular stock is undervalued, overvalued or priced just right, several metrics can be used. Chief among these include checking whether the market fundamentals of the company tally with its current valuation, where the stock’s P/E ratio currently stands compared to its traditional ratio and, finally, how the stock’s P/E ratio compares to its industry peers.’ These checks are, of course, not 100% foolproof or comprehensive for that matter, but in about 8 out of 10 cases can tell a pretty good story of whether a stock’s current valuation is realistic or otherwise.

Priceline began operations in 1998 and is regarded as one of the bellwether Dot.com companies that survived the late 2000 Dot.com crash. The Dot.com bubble-burst was of course the inevitable waterloo that wiped off the slate numerous fashionable Dot.com startups that had trendy, but not market-driven, business models. A chief characteristic of these companies was that they had incredibly high valuations that had little or no back-up in terms of company fundamentals. Before the (in)famous Dot.com crash, Priceline’s stock traded in the $300-$500 range, and even came close to hitting the $1,000 mark. The Dotcom bubble burst saw the company’s stock take a nosedive to trade at around the $20-$30 range. The stock has since then been gradually recovering to its current trading range. Let us now kick off an evaluation of Priceline stock by looking at the company’s fundamentals.

Q1 2013 results

Priceline.com Inc. reported Q1 2013 gross-bookings amounting to $9.2 billion; a 36% growth compared to the same quarter in 2012.Non-GAAP net income came in at $297 million with a $5.76 EPS; a 35% growth compared to first-quarter 2012, and better than earlier consensus estimates of about $5.27 EPS. Priceline’s hotel room reservations- $63.2 million in the quarter- registered a robust 38% growth. The firm’s strong growth in most of its business segments was attributable to the strong showing in its European market as well as other markets such as Americas and Asia-Pacific. Strong growth by Priceline’s subsidiary RentalCars.com segment is also one of the big reasons why the company returned strong Q1 2013 results.

Priceline estimates that its second-quarter 2013 will be $1.62 billion with an EPS forecast around the $8.87-$9.45 range- about 15% -22% growth. Consensus EPS estimates hover around $9.58, with a revenue of about $1.64 billion. Priceline management said that the ‘‘uncertain global macroeconomic conditions’’ was the main reason they gave an elevated variability in their earnings guidance.

Comparing Priceline’s ROE to business rivals’ Expedia as well as Orbitz Worldwide (OWW) for the past 10 years, the company’s margins trump the margins of its two big rivals by a mile (see chart below).

P/E ratio comparison

Priceline’s current P/E ratio is 31.05 TTM.The stock’s P/E ratio compares favorably with that of close peers Expedia - P/E ratio of 50.26 TTM and Orbitz - P/E ratio of of -3.58 TTM. Expedia probably provides a much better benchmark for comparing with Priceline.com,considering that the firm is currently ranked #2 for OTAs after Priceline, in terms of revenues and market cap. Orbitz has really been performing horribly-the company has recorded losses in 10 consecutive years(see chart above) and now commands a low market cap of a mere $1.1 billion. The average S&P 500 P/E ratio stands at 19.56.

Priceline’s shares once traded very close to the $1,000 mark before the Dot.com bubble-burst, long before it had the kind of revenues it now enjoys. Priceline’s P/E ratio must have been unrealistically high then. A considerable amount of price inflation has also happened since the year 2000 mainly due to the depreciation of the dollar (probably 50% down), meaning $1000 now probably is equivalent to $500-$600 in 2000.

Strong catalysts for Priceline’s future growth

Priceline has successfully built a pretty strong business model that has been shown to work over the years.The company  has revolutionized traditional travel reservations by offering its online customers deep discounts  accompanied by a ‘‘non-disclosure’’ policy of hotel identities. Priceline.com has an enviable track record – the firm has never posted losses for the last 10 years. In contrast, close peer Expedia recorded losses in 2008. Its ROE is incredibly high - 44% as opposed to Expedia’s 13%. Online companies such as Google and Amazon(AMZN) have emerged as industry leaders in their business segments; Priceline.com is now the OTAs leader.

Priceline is well-poised to gain a good proportion of market share in the emerging markets. Many analysts predict that China will eventually overtake the US as the leading travel market, probably as soon as 2020.The South-East Asian market is slated to grow at a robust 20% through 2016. Priceline’s subsidiary Agoda.com will give the company a good launching pad for getting into emerging markets, which have plenty of growth potential, considering that just 25% of travel reservations are made online in these markets, according to an eMarketer report.

Priceline recently acquired Kayak Software Inc.- the website meta-search engine for OTAs. This move was widely hailed by many industry afficionados as being highly strategic and perfectly-timed. Kayak brings several strong features to Priceline.com’s mix, including wide popularity,a global reach, and  a profitable business. Kayak will also help Priceline reduce its dependence on expensive Google adverts.

Priceline plans to spend about $1billion in 2014 in offline advertising. One of the principle areas the money will be spent is in the growth of its 11% US market share. Expedia.com owns the lion’s share of the US market- a good 43%. Expect Priceline to go flat out to try and grab some market share from Expedia.

Bottom Line

Priceline.com has made some very strategic acquisitions, enjoys high margins and has built a sound and highly profitable business model. Future estimates for revenues and estimates all indicate that good growth is anticipated.The $1,000+ price target for the company by several analysts is fully merited this time round, and investors should therefore hold the shares.


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