Value investors like bargains. At first glance, leading online travel website specialist Priceline Group (BKNG -0.28%) might seem like the opposite of a bargain, with a share price that's among the top five stocks in the U.S. stock market.
Yet for those who can look beyond share price, Priceline offers an interesting value proposition right now. Its valuation based on traditional earnings-based metrics might not make it look especially cheap, but its growth potential puts the stock's current price in perspective and makes it worth closer examination from a value-investing angle.
Image source: Priceline Group.
Why most value investors ignore Priceline
Priceline isn't on the radar for many value investors for a number of reasons. For some, the stock's price tag of more than $1,700 per share is an immediate turnoff. That's largely meritless, because share price only reflects the total value of a company divided by its number of shares outstanding. Companies can do stock splits to reduce their share price, inflating their total shares outstanding and having no fundamental impact on the overall value of the business. Priceline has chosen not to do that, avoiding traditional forward stock splits throughout its history as a publicly traded company.
Even beyond share price, some value investors find Priceline expensive. When you look at its earnings over the past 12 months, Priceline shares trade at a trailing earnings multiple of about 24. That's greater than the average for the stock market. Even when you incorporate future earnings projections, a forward multiple of more than 20 is slightly pricier than the overall market as well.
How Priceline's growth can justify its valuation
Yet earnings-based valuations only give half of a company's story, leaving out growth prospects. A company that's growing at a sharp pace deserves a higher earnings multiple than one with flat earnings prospects going forward.
For Priceline, growth has been a huge factor in its success. Over the past five years, revenue has grown at nearly a 20% annual clip on average, and net income has seen a growth rate of about 21% annually. The travel website's most recent quarterly results from the third quarter of 2017 showed similar growth rates, and key metrics like gross bookings and hotel room nights have continued to climb.
Priceline also takes maximum advantage of the business it gets. Gross margin figures are substantially above those of its key competitors, showing Priceline's emphasis on cost efficiency. A strategy that has focused on the greater growth potential from international markets has also paid off for the company, leaving most of its rivals playing catch-up as they try to go beyond the once-lucrative domestic travel market to capture worldwide opportunities.
A problem for Priceline -- and a possible solution
Despite its promise, Priceline has had to face one issue that most high-growth companies eventually deal with: slowing growth rates. As impressive as 20% revenue growth is, that figure was closer to 30% just a few years ago. Net income gains were even more robust in past years. The pace of the slowdown has led some to fear that Priceline's best days are behind it. That's been a big part of the reason why Priceline shares have fallen from their summer highs.
The most important question for Priceline to answer in 2018 and beyond is whether it can find new drivers of growth. The company has said that the advertising channels on which it relied in the past have started to see diminishing returns, and rising competition has eaten into growth from those traditional sources. Priceline has diverted some resources toward building out its technology, enhancing its booking platforms, and adding vacation properties to its extensive list of hotels and other accommodations in order to hold competitors like Airbnb at bay.
Is Priceline a value stock?
Priceline's recent behavior suggests that investors have suffered a loss of confidence in the online travel site's ability to keep growing at its past pace. The stock has therefore gotten punished somewhat. That's a common theme that value investors have used to their benefit for years. If you believe that Priceline has the ability to discover new opportunities to grow, then now's a good time to look at the stock like a value investor would -- picking up shares while they're relatively cheap with the expectation of a recovery in the future.
