Online travel portal Priceline Group (NASDAQ:PCLN) has produced amazing long-term returns for those who invested early on in its history. Over the years, Priceline has kept defying skeptics with its continuing growth, yet that doesn't stop bearish investors from drawing negative conclusions from even the slightest slowdowns in Priceline's growth rates. Tuesday morning's third-quarter earnings report from Priceline showed a similar pattern to what longtime investors have seen before, with impressive results but questionable future guidance leading to uncertainty among momentum-based traders and a resultant decline in the share price. The sell-off naturally has some shareholders wondering whether it's time to sell. Let's take a closer look at how Priceline did last quarter.
How Priceline sustained its growth
Priceline's third-quarter results didn't leave much room for shareholders to complain. Revenue of $2.84 billion was just a bit better than most investors had expected to see, but Priceline's bottom line is where the company really stood out. Adjusted earnings of $22.16 per share beating the consensus figures by more than $1 per share, representing EPS growth of 28% from the year-ago quarter. More importantly, they blew out Priceline's own estimate for between $19.60 and $21.10 per share, once again giving evidence of how the company has routinely sandbagged its future guidance.
Looking more closely at the results, Priceline saw solid growth throughout its business, as gross travel bookings climbed 28% to $13.8 billion. CEO Darren Huston pointed to the success of several of Priceline's most important segments, as the accommodation business saw 27% in room-nights booked to 95 million and its rental car business saw an 18% rise in volume from year-ago levels. The Booking.com unit also grew strongly, and it has more than 540,000 providers on its website now, up more than 50% from 2013's third quarter. Year-over-year airline-ticket sales grew at a slower pace of just 8%, but that slowdown reflected relative strength in last year's quarter compared to earlier in 2013.
Priceline got a big boost in its agency revenues, with gains of 33% offsetting weakness in its merchant revenues. Advertising makes up a relatively small part of Priceline's business right now, but it nevertheless has had impressive growth in that arena, shooting up 70% over the past year.
Should you worry about Priceline's future?
Once again, though, traders reacted negatively to Priceline's future guidance, which painted a typically dire picture of the company's immediate future. For the current quarter, Priceline said that it expects growth in gross bookings of just 8% to 15%, with a roughly five percentage-point hit coming from the strong U.S. dollar. Revenue growth will slow to 11% to 18% according to Priceline, and its earnings per share will come in between $9.40 and $10.10, which is well below the $10.91 per share that most investors foresee.
Those who aren't familiar with Priceline's past guidance practices naturally assume that such a sharp slowdown in growth has the potential to crush its share price. With the stock trading at 30 times trailing earnings, Priceline's valuation assumes that its past growth rates will continue into the future at a reasonable pace. Moreover, high-growth stocks have been under pressure in recent months, as momentum-based investors have gotten increasingly skittish about the future direction of the overall market.
With such a long track record of issuing negative guidance that proves to be overly pessimistic, it's easy to think of Priceline's warnings as crying wolf one too many times. At some point, Priceline will be correct in its projections about future sluggishness, as no growth stock can continue such a steep upward trajectory forever. For now, though, with economic factors helping to support the U.S. travel industry and given the company's long-term success, Priceline's 6% drop in pre-market trading immediately after the earnings announcement seems like an overreaction. Those who've looked for a chance to buy into the travel portal on weakness should see this as an opportunity worth considering, given Priceline's fundamental strength to date.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.