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

Priceline is bumping into the law of large numbers which may present the first good buying opportunity in a year.

Feb 24, 2014 at 6:00PM

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.

Looking for a tech company making all the right moves?
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Priceline.com. The Motley Fool owns shares of Amazon.com and 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers