Priceline Group Inc: This Incredible Growth Story Is Far From Over

Source: The Priceline Group

The Priceline Group (BKNG -0.45%) did not experience the stock price appreciation of Facebook, Amazon, Netflix, and Google in 2015, but over the past decade, Priceline stock has increased over 4,900%. In fact, a $10,000 investment in Priceline 10 years ago would now be worth over $360,000 -- far more than a similar investment made in the other companies.

Although Priceline is known in the U.S. for its quirky William Shatner commercials and "name your own price" travel reservations, 87% of Priceline revenue and 94% of its profits are derived from international markets. Its large international presence can be attributed to the 2005 acquisition of Booking.com, which, at the time, was a small Netherlands-based start-up. Today, Booking.com has nearly 850,000 properties in 221 countries under contract.

Growth at Priceline has been nothing short of spectacular. Gross bookings, a metric used to measure the total dollar amount of all travel services purchased by customers, has grown at annual rate of 41% since the first full year of the Booking.com acquisition. The number of room nights booked has grown from 18.7 million in 2006 to 346 million at the end of 2014. Most impressive has been how Priceline's business growth has translated to profitability. Operating profit in its latest fiscal year was $3.1 billion, a 27% increase over the prior year and a 66% annualized increase over the past decade.

Has the music stopped?
Since delivering its third quarter results this past November, Priceline stock has fallen over 20%.

The fear on Wall Street is not only around travel safety concerns but slowing growth. In the quarter ended Sept. 30, Priceline's gross bookings and gross profit grew at 6.9% and 11.4% year-over-year, respectively. In the fourth quarter, the company expects just single-digit growth.

So, is this it for Priceline?

At a market capitalization of $55 billion, Priceline won't grow another 5,000% over the next 10 years to become a $2.75 trillion company. Eventually, Priceline will succumb to more modest growth. However, it is much too soon to begin writing the obituary for this growth story.

As mentioned earlier, Priceline derives over 90% of its profits internationally, with most of its business done in Europe. In the first nine months of 2015, the value of the U.S. dollar strengthened against the euro from $1.38 to $1.12. Since Priceline reports its business in U.S. dollars, bookings and gross profits both suffered significantly. However, on a constant currency basis, the business is still strong.

Source: Company filings

Additionally, Booking.com increased its property count 41% from 600,000 at the end of 2014 to 846,000 today. Room nights also grew 25% over the prior year.

As the company continues to expand the number of properties under its umbrella, Booking.com will grow stronger as a platform for customers who are looking for the largest selection of accommodations at the lowest prices. In turn, more hotels will look to utilize Booking.com as the brand draws more traffic to its site.

The opportunity in Asia
After consolidating the European market, Priceline will also need to find new arenas for growth.

The data is slightly stale, but according to Phocuswright, a leading online travel research company, 25% of the total travel market in the Asia Pacific region was booked online in 2013. In comparison, the European and U.S. online travel market penetration is closer to 45%.. This makes the Asian market particularly attractive, especially if it eventually achieve the online penetration rates of Western regions.

Priceline is well-positioned in Asia, too. In 2007, Priceline acquired Agoda.com, one of the leading online travel agents in Asia. In December 2015, Priceline also invested $500 million in Ctrip (TCOM -1.48%), China's leading online travel agency. This brought Priceline's total investment in Ctrip to $1.9 billion, or 10.5% of the company. Booking.com currently has 41,000 properties listed in China, and it should expect many more from its Ctrip partnership.

But what about Airbnb?
According to The Wall Street Journal, Airbnb is estimated to have $900 million in revenue in 2015. This is an impressive feat for a company founded only seven years ago. Other impressive metrics include over two million active listings and 78 million nights booked -- double the amount from 2014.

As Uber disrupted the taxi business, Airbnb is looking to disrupt the lodging business, and in turn, an argument can be made that online travel agents are in trouble, too. At an estimated valuation of $25.5 billion, Airbnb has achieved nearly half the market capitalization of Priceline. However, with four times the number of room nights and expected revenue in excess of $9 billion in 2015, Priceline has a comfortable lead over the younger competitor.

While Airbnb is no doubt going to take some market share from Priceline and other online travel agents, the global online travel booking market is estimated to be $1.2 trillion, so there is still a lot of room for growth with multiple winners.

Even then, Priceline is not sitting on its hands while Airbnb captures the entire vacation rental market. As of this writing, Bookings.com offered nearly two million listings with almost 400,000 vacation homes, villas, and apartments.

Priceline is currently facing strong headwinds, but it has nothing to do with its direct line of business. The U.S. dollar has deflated Priceline's reported growth, but a deeper look into the numbers shows that the business is still growing at a strong rate. I am not going to pretend to know where the U.S. dollar is headed, but long-term, investors should expect the stock to make a comeback, too.