Growth Is Slowing at Priceline, Is It Time to Book Your Exit?

Priceline.com (NASDAQ: PCLN  ) announced earnings that blew away profit expectations but left investors scratching their heads about the outlook. Revenue of $1.54 billion was in line with expectations of $1.52 billion, but EPS of $8.85 blew away the expected $8.29. The stock ran up to an all-time high in after-hours trading, hitting $1,335.

But then the guidance came out, and it disappointed. The Street had been expecting EPS of $7.21, and the midpoint of guidance was $6.60. It's a good rule to never buy in the aftermarket until you have the whole picture, and this is a good example of why. The stock pulled back into the red, but settled up 2%. It may not be able to hold its gain, though.

Accounting headwinds will slow growth later this year
Priceline is facing a few accounting headwinds in the first half of the year. Easter is coming in the second quarter, rather than the first quarter, pushing out a major travel event. Then, in the second quarter, the benefit from the Kayak acquisition rolls past its first anniversary, causing growth rates to slow. These two issues have nothing to do with the fundamentals of the business, but as earnings growth slows, the price could come in.

Priceline isn't alone
Amazon.com (NASDAQ: AMZN  ) recently announced its fourth-quarter results and saw growth slow from 25% to 20% from the September quarter. Even though the business remains healthy, the stock fell 16% over the next week. Amazon announced that it would consider raising the price of its Prime service, showing that it may become more focused on profitability going forward. But the stock suffered a loss in the meantime.

Addicted to positive surprises
The Street is used to healthy upside to profit estimates. In three of the last four quarters, Priceline beat earnings expectations by more than 6%. Investors have come to think of Priceline like the mailman -- always delivering. But numbers are getting larger -- much larger -- and hurdles may be more difficult for the company to reach.

As growth contracts, so does the earnings multiple
The guidance for the first quarter implies 15% growth. That's a huge number, but it's one that doesn't fit with today's multiple. If this number is right and the company doesn't beat it, the multiple will come screeching back. Before today's announcement, Wall Street analysts were looking for 25% growth, or $50 per share, in 2014. It's a huge growth number for such a large company, so the stock was rewarded with an equally huge earnings multiple. That won't be the case if growth slows.

Going into the close, Priceline was trading at 26 times next year's expected earnings. Notice that correlation? Growth is 25% and the earnings multiple is 26 times, or a PEG ratio of around 1. Some professionals really do derive price targets that way.

Case for a sub $1000 price
If that growth rate falls to 15% and the company meets estimates going forward rather than beating them, the full-year earnings would be $47.85 per share. This is a good number, but because growth would be slowing, the multiple will fall as well. Maybe the multiple won't fall quite as fast as the growth rate, making a multiple closer to 20 times earnings, rather than 15, appropriate. If this scenario plays out, however, you're left with a price of $957, or a decline of 26% from $1,300.

Coming pullback could be a buying opportunity
Priceline's fundamentals remain strong, and it is one of the best-managed technology companies. But if it is unable to produce upside to the guidance offered on the call, it could be valued as a maturing company, at least for a time. Even if this does occur, Priceline is a company that you could buy on the dips, which will be more pronounced. The fundamentals may not be turning, and you may get a good buying opportunity before the seasonally strong third quarter.

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  • Report this Comment On February 25, 2014, at 3:58 AM, HabeasScorpius wrote:

    Kayak anniversary means growth slows???

    Imagine if back in July 2006, you wrote, "Hey, it's the 1 year anniversary of the Booking.com acquisition, so you can expect that there won't be any revenue growth for PCLN from *that* particular business unit going forward."

    I think Finnegan was talking about profit margin growth- PCLN used to pay Kayak for ads in the past, and now that they own Kayak they don't have to. This improves profit for years 1, 2, 3, etc., but does not automatically make the difference between years 1 & 2 any better than the difference between years 0 & 1.

    Profit margin is mathematically limited to 100%, so at some point revenue growth is much more important than margin growth.

  • Report this Comment On February 27, 2014, at 4:05 AM, dpelleratgmail wrote:

    Thanks for taking the time to voice your concern with my thought process.

    It isn't simply about the Kayak anniversary. The outlook the company offered represents a slowdown. It could be the result of a number of things, from simple conservatism to the growth prospects maturing. On the call, mgt said that PCLN had been underrepresented on Kayak. Buying the company to fix that problem would result in a step up in growth that will anniversary. Growth of the Kayak platform will continue but we dont know what the natural growth rate is.

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