Priceline.com (NASDAQ:BKNG) is firing on all cylinders lately, the stock has risen by nearly 65% year to date, and it's now trading above the psychological barrier of $1,000 per share. Considering this performance, investors may be wondering if it's already too late to ride this growth story. Fortunately, Priceline has plenty of gas left in the tank.
Priceline is the industry leader in online travel agencies – OTAs – the companies that allow customers to make online reservations for hotels, plane tickets, and car rentals, among other travel-related services. The internet has some clear advantages, like speed and comfort, when it comes to making these reservations, but the impact on price efficiency is even more important.
Travelers can usually get some exceptionally attractive bargains through OTAs, and it's not only because the operating costs are lower for online travel agencies. Companies like Priceline allow hotel operators, airlines, and rental car companies to offer huge discounts without damaging the brand value, and that's a key advantage to consider.
When it comes to businesses like hotels, occupation is a key factor for profitability: The additional cost of one more guest in a hotel room that would be otherwise empty is almost irrelevant, so it makes a lot of sense from a financial point of view to offer steep last-minute discounts if the room is going to be empty anyway. The same goes for an unoccupied seat in a plane, or a car wasting time in the parking lot of a rental car company.
The problem with offering aggressive discounts is that the brand could get tarnished and the company can lose pricing power over time. Doing it via OTAs as last-minute deals and under special conditions, companies get to clear their inventory by selling to bargain hunters while at the same time protecting the brand image. Needless to say, clients are more than happy with these kinds of deals, which can be spectacularly cheap.
While Expedia (NASDAQ:EXPE) competes head to head against Priceline in the United States, Priceline is much stronger in Europe, where Booking.com generates more than 80% of the company's profits. Even under harsh economic conditions, Europe is a major destination for visitors from all over the world, and this provides a key competitive advantage for Priceline.
Expedia is more focused on the merchant business model, which means buying blocks of rooms and selling them at a mark-up to travelers. This segment generated nearly 45% of revenue for the company during the last quarter.
Priceline, on the other hand, gives more weight to the agency model: allowing hotels and other companies to list their own prices and pay Priceline a commission for every transaction. This has proven to be a more efficient strategy for growth over time.
Orbitz Worldwide (UNKNOWN:OWW.DL) is a third competitor, but it comes way behind Priceline and Expedia in terms of revenue and market share. Orbitz generated sales of $225 million in the last quarter, while Priceline and Expedia produced $1.6 billion and $1.2 billion, respectively.
The company is moving in the right direction lately: Orbitz delivered a 40% increase in hotel revenue for the last quarter and guidance for the next quarter. However, it still has a long way to go before it can be considered a serious threat to Priceline and its dominant market position.
Thanks to its strategic position in the European hotel business and its smart business model, Priceline has managed to outgrow its competitors in the last several years. The company has increased sales at 30.1% per year over the last five years, while Expedia has grown at 8.6% annually and Orbitz has been stagnant during that period.
Priceline benefits from the network effect: Travelers want to go where they can find more and better deals, and companies in the travel businesses choose to partner with the OTAs that can bring in more customers. More users make the service more valuable, and this attracts more users on both sides of the transaction.
The company is also more profitable than the competition: While Priceline has operating margins in the area of 34%, Expedia is much less profitable, with operating results at 6.5% of sales, and Orbitz is still struggling to make money on a consistent basis. This means that Priceline has more financial firepower to invest in areas like marketing and technologies.
The company continues performing remarkably well. Priceline delivered sales growth of 26.6% for the last quarter thanks to an increase of 38% in gross bookings. International bookings climbed 44%, while domestic ones increased 12%. Non-GAAP net income for the quarter was $508 million, a 25.6% increase versus the previous year.
In spite of its steeply rising price, Priceline does not appear to be overvalued for such a high-quality growth story. When analyzing ratios like P/E, forward P/E, and price-to-cash flow from a historical perspective, the company is trading in line with historical averages.
Priceline may not be screamingly cheap, but it's certainly not in bubbly territory from a valuation point-of-view, either.
Priceline is an industry leader in an attractive business with promising growth prospects from a long-term point-of-view. The company has consolidated its leadership position over the last years, and its valuation is still looking reasonable in spite of the recent run-up. It's not too late to ride Priceline for long-term gains.