Priceline (NASDAQ: PCLN ) has delivered truly explosive gains for investors over the last several years, as the company has surpassed rival Expedia (NASDAQ: EXPE ) and consolidated its leadership position in the very profitable online travel industry. However, investment decisions need to be based on future potential, not past performance. Is it a good time to buy Priceline, or is it already too late to invest in the company?
A high-quality business
Priceline is in the business of matching buyers and sellers in different travel-related industries. The company operates different platforms allowing customers to make online reservations for hotels, airline tickets, and car rentals. Priceline is also in the process of acquiring online restaurant reservation platform OpenTable (UNKNOWN: OPEN.DL ) in a $2.6 billion cash deal; this will generate opportunities for additional growth venues in the years ahead.
Priceline operates mostly on the agency business model, which means allowing hotels and other service providers to list their own offers, paying the company a commission for every transaction. This means there is almost no associated cost of sales, and the company gets to leverage its fixed costs on a rapidly growing revenue base as it expands over time.
This smart and efficient business model is generating tremendous profitability for investors in Priceline. Gross margins are exceptionally high, at more than 85% of revenue, and the company generates an operating margin above 35% of sales.
Priceline vs. Expedia
Priceline's main competitor is Expedia, which has a considerable presence in the U.S. However, Priceline's focus on international markets has turned out to be a winning strategy over the last several years, and Priceline has clearly outgrown Expedia over time.
According to management, Priceline continues to gain share in different categories and geographies as of the last quarter, and financial reports from Priceline and Expedia confirm this.
Priceline delivered a big sales increase of 26% during the first quarter of 2014, reaching $1.64 billion during the period. Gross travel bookings, meaning the dollar value of services purchased on the platform, came in at $12.35 billion, a big increase of 34% versus the prior year.
Expedia is also doing well, but it's not growing as rapidly as Priceline. Expedia announced a 19% increase in sales during the quarter ended on March 31 to $1.2 billion. Gross travel bookings came in at $12.6 billion, a 29% increase versus the first quarter in 2013.
Both Priceline and Expedia have increased their advertising spending lately, and this is a relevant risk to watch, as it could have a negative impact on profitability levels if a competitive war becomes a more serious problem in the future.
However, the online travel industry is providing enough opportunities for Priceline and Expedia to grow and thrive at the same time. Besides, Priceline looks as strong as ever on the competitive front as the company continues building its network of hotels and other service providers; it announced on July 1 that it now has more than 500,000 hotels included in its Booking.com platform.
Growth and valuation
In spite of the spectacular returns the company has produced over the last several years, Priceline does not look excessively valued. When looking at valuation ratios such as forward P/E and enterprise value/EBITDA, Priceline is trading roughly in line with historical valuation ratios over the last five years.
Furthermore, the company still has a lot of room for expansion. International bookings grew 37% during the last quarter, which, according to management was because of "increased penetration of core Western European and North American markets but also very attractive growth in newer markets, including Eastern Europe, the Middle East, South America and the Asia-Pacific region."
The acquisition of OpenTable will provide Priceline a leadership position in online restaurant reservation, a business with many synergies with the company's other segments.
OpenTable covers a network of more than 31,500 restaurants, and the company makes more than 15 million reservations per month. However, it only has 7,721 restaurants in international markets as of the first quarter in 2014, so Priceline's presence and experience in global markets could be enormously valuable for OpenTable when it comes to international growth. Besides, there are clear opportunities for cross-promotion, as travel and restaurants are closely related industries.
Priceline has delivered impressive gains over the last few years, but that's not the end of the story. Considering its outstanding financial performance, rock-solid competitive position, robust growth opportunities, and reasonable valuation levels, the company has what it takes to continue outperforming the markets in the years ahead.
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