The summer of 1999 was hot and long. Words like "dot com" or "web" sounded the way "3D printers" or "e-cigarettes" sound today. The web was the next big thing, and online traveling sites were regarded as gold mines by many. In this context, online travel booking company Priceline (NASDAQ:BKNG) saw its share price reach almost $1000.
The aftermath was terrible. Priceline's shares dropped all the way down to $10. The company kept growing its revenue patiently, but its stock kept trading at levels well below the historic maximum price.
Surprisingly, the recent revenue figures and earnings beat caused the stock price to reach levels similar to 1999 again. However, the question most investors ask themselves nowadays is: How long will Priceline be able to keep its current price level, considering it is already trading at around 30 times earnings, well above the standard 17 times for the Standard & Poor's average?
The latest earnings call
Judging from the latest earnings call, there are plenty of reasons that justify Priceline's current stock price. Investors are valuing Priceline as a growth stock because even after 14 years in the same business, it can increase its total gross travel bookings by approximately 27%-34%.These are amazing growth figures for a commercial site that has been online since 1998!
Net earnings also rose by 24% to $437.3 million, resulting in GAAP earnings per share of $8.39.
The secret of such success probably relies on the increase in international bookings (44%), well above the 12% increase in U.S. bookings, where Priceline already has a strong market share.
Both hotel room nights and rental car days coming from Rentalcars.com were also growth drivers. Rentalcars.com is an early star in Priceline's websites portfolio, which confirms the fact that the giant is capable of building successful new websites. It seems Priceline is taking advantage of the huge traffic its hotel reservation websites get to convert hotel booking into car rentals using cross promotion campaigns.
Why I'm a careful bull
The ability of building successful new websites in segments other than hotel bookings and the fact that Priceline currently accounts for only a fraction of international hotel bookings indicates the company's amazing growth period will not be over any time soon. But the company faces some important challenges.
One of these bearish factors is, ironically, the relatively high margin that Priceline enjoys. Gross bookings made up 16.6% of total revenues.. In other words, for a $100 hotel room that is booked, Priceline.com will get a $16.60 commission. This seems too high to be sustainable in the long run, considering the current levels of competition.
Another risk involves the increasing relevance of meta-search websites. Meta-search sites, like Adioso.com or Cheapflights.com, aggregate travel search results from hundreds of travel service providers. When compared to traditional booking sites, meta-search sites offer more search results simply because they can have access to wider databases to fetch more info. This could, according to the latest 10-Q, potentially reduce the traffic to Priceline's websites and increase user acquisition costs.
Priceline's price-to-earnings ratio of 30.9 could seem high for a company facing strong competition from meta-search engines in a cyclical market. But when compared against TripAdvisor (NASDAQ:TRIP) (47.5) or Expedia (NASDAQ:EXPE)(46.3), Priceline actually seems to be attractively valued at the moment.
Expedia is having a tough quarter after TripAdvisor (one of the main contributors to Expedia's traffic) decided to shift to meta search display in the past quarter. The latest earnings call showed revenue grew only 16%, which was lower than consensus. Even worse, adjusted EBITDA fell 14% from a year ago, which shows Expedia is increasing its marketing spending to keep growth alive.
Furthermore, despite owning eLong (leading online travel planning website in China), Expedia has not been growing in international markets as much as competitor Priceline has. According to Morningstar, international bookings at Expedia have grown 30% annually since 2007, compared with Priceline's 53%.
Now, TripAdvisor does look like a better alternative to Priceline. It showed strong growth in the second quarter of 2013, with a 25% year-over-year increase in revenue, driven by traffic growth. It achieved 220 million average unique monthly visitors last quarter, representing an increase of 57% year-over-year. Many new users are mobile-based, evidencing the merits of establishing strategic partnerships. An example: TripAdvisor entered into a partnership with Samsung to make its application the only travel application to come pre-installed on the new Samsung Galaxy S4.
Final foolish thoughts
I'm a careful Priceline bull. The high volatility in travel demand is a well-known fact as evidenced by the historical price share movements of Priceline.
It is also important to not to overestimate Priceline's capacity of keeping high margins in this market, where meta search travel engines represent a short-term risk to traffic. However, Priceline's problems are not unique. Expedia and TripAdvisor are also exposed to similar risks. In this context, Priceline's relatively low price-to-earnings ratio and emerging presence in international markets indicate an attractive reward-to-risk ratio.