Priceline Is on Fire: Should You Buy?

Source: Priceline.com.

Priceline.com (NASDAQ: PCLN  ) delivered remarkably strong earnings figures for the fourth quarter of 2013, and the company is looking well positioned for growth in the years ahead. Should you make reservations for more growth in the leading online travel agency?

Full speed ahead
Priceline delivered a whopping increase of 39% in gross bookings during the fourth quarter of 2013 to $9.1 billion. Sales during the quarter grew 29.4% to a record $1.5 billion, and adjusted EBITDA increased 35.8% to $578 million during the period. Non-GAAP net income during the quarter came in at $8.85 per share, comfortably beating analysts' estimates of $8.29 per share and representing an increase of 30.7% versus the $6.77 per share the company earned in the same quarter of the previous year.

For the first quarter of 2014, management is forecasting an increase of between 23% and 33% in gross travel bookings and a growth rate of 15% to 25% in revenue. Earnings-per-share guidance in the range of $6.35 to $6.85 came in below expectations. However, Priceline has consistently beaten analysts' expectations over the last 15 quarters in a row, as management tends to regularly underpromise and overdeliver. 

The company is performing remarkably well on multiple fronts; Priceline continues building its worldwide supply with more than 425,000 hotels and other accommodations in 195 countries, an increase of 54% over last year. It is also expanding rapidly in the key mobile segment; the company exceeded $8 billion in gross mobile bookings during 2013 versus $1 billion in 2011 and $3 billion in 2012.

The company is the undisputed leader in the European market with Booking.com, and management is encouraged by the performance of Agoda.com in the fast-growing Asia-Pacific market. Priceline also delivered a 27% increase in gross bookings and 28% airline ticket growth in the U.S., so the company seems to be gaining momentum and market share in the U.S. market, too.

A big fish in a growing pond
Priceline is the leading player in the online travel industry. This has important advantages for the company when it comes to financial resources to invest in areas like technology, acquisitions, and advertising. In addition, economies of scale mean higher profit margins for Priceline versus the competition.

The network effect provides a sustainable source of growing competitive strength for the company. Hotels, airlines, and car rental companies want to go with the online travel agency that provides access to more potential customers, and travelers choose services that offer more and better deals. Priceline becomes more valuable as it grows in size, and this creates a self-sustaining process of revenue growth and increasing service value.

Importantly, the online travel industry seems to be generating substantial growth for different players, not only Priceline, and this indicates that there is still plenty of room for expansion over time.

Expedia (NASDAQ: EXPE  ) is Priceline's biggest competitor, and the company has also generated vigorous growth over the last several quarters. Expedia reported an 18% increase in revenue for the fourth quarter of 2013 to $1.15 billion, and gross bookings increased by 21% to $9.1 billion during the period.  

Expedia sales excluding the acquisition of Trivago increased at a more moderate rate of 14% during the quarter, so Priceline seems to be clearly outgrowing Expedia on an organic basis. However, it's good to know that overall demand is expanding strongly enough to generate sizable growth opportunities for different players in the online travel industry.

Even Orbitz Worldwide (NYSE: OWW  ) , which is materially smaller than Priceline and Expedia, reported better-than-expected performance for the last quarter. Orbitz reported a 15% increase in room nights for the quarter, and the company saw improving profitability margins during the period.

Wirth revenues of only $197.4 million during the fourth quarter of 2013, Orbitz Worldwide can hardly be considered a big threat for Priceline or Expedia at this stage, but the company seems to be clearly moving in the right direction in terms of growth and profitability.

Bottom line
Priceline is delivering outstanding financial performance for investors, and it is outgrowing competitors like Expedia and Orbitz while leveraging itself and reinforcing competitive advantages. Demand for online travel services is looking quite healthy judging by financial results from other players in the industry, so the journey for growth is far from over for investors in the online travel leader.

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