Priceline (NASDAQ:PCLN) stock is having a difficult year, falling by nearly 8.6% over the last 12 months because of growing concerns about the depreciating euro and its impact on Priceline's international business, which is particularly important for the company.
However, many analysts seem to believe that Priceline still offers substantial upside potential from current levels. The most bullish price target for Priceline stock is $1,500 per share; this would imply a big price increase of more than 30%.
Wall Street forecasts are nothing more than estimates, and they are always subject to errors and revisions, so these targets need to be taken with a grain of salt. However, when looking at the numbers in the context of Priceline's growth potential, there are strong reasons to believe that $1,500 per share is a reasonable target for Priceline stock.
Priceline is the global leader in online travel services. The company's closest competitor is Expedia (NASDAQ:EXPE), which has a big presence in the U.S. However, Priceline is way ahead of Expedia in international markets, and the company is much bigger in terms of revenues too: Priceline produced $8.4 billion in sales during 2014, versus $5.8 billion in annual sales for Expedia.
Priceline operates mostly on the agency business model, which means hotels and other service providers list their own offers and pay Priceline a commission for every transaction. This means there is almost no associated cost of sales, and the company gets to leverage its fixed costs on a rapidly growing revenue base as it expands over time.
This business model is spectacularly profitable: Priceline produced a gross profit margin of 93% of sales and an operating margin above 36% of revenues during last year. The company has an extraordinary track record of growth; sales have increased at 29.3% annually through the last five years, while earnings per share grew at an even stronger 35.8% per year.
Europe is a big market for Priceline, however, and the euro has been quite weak lately, so Priceline's international business could weigh on the company's performance in the middle term. However, the long-term growth story is pretty much intact.
By the numbers
Wall Street analysts are on average forecasting earnings per share of $57.59 for 2015, which would represent an increase of only 8% versus $53.31 in adjusted earnings per share during 2014. These forecasts are clearly assuming a big deceleration in growth, so analysts must be expecting that the euro depreciation will be major drag on performance.
It's important to note that Priceline delivered a big increase of 22.6% in adjusted earnings per share during the fourth quarter in 2014, a period in which economic conditions in Europe were already a considerable problem.
The euro depreciated nearly 8% versus the U.S. dollar in the fourth quarter last year. Priceline's gross travel bookings grew by 17% in U.S. dollars, and by a much larger 23% on a currency adjusted basis, showing that currency headwinds were a considerable drag during the last quarter. Still, Priceline delivered rock solid financial performance while facing challenging conditions.
Based on data from Zacks, the company has delivered earnings per share above Wall Street forecasts in each and every quarter since 2011. If history is a valid guide, analysts could be underestimating Priceline's earnings growth once again.
Even if we conservatively assume that Priceline will report in line with expectations, a price of $1,500 per share by the end of the year would put Priceline at a trailing P/E ratio of 26 and a forward P/E ratio of 22. This would be a premium versus the overall market, but hardly excessive for a company with sky-high profitability that delivers impressive growth rates through good and bad economic times.
The following chart from YChart shows Priceline's valuation over the last five years. The stock clearly looks compelling when looking at different valuation ratios, such as forward P/E, price to free cash flow, and enterprise value to EBITDA.
Stock prices can't be predicted with precision, especially in the short term, so it's impossible to tell if Priceline will be trading near $1,500 per share in the coming year. But one thing looks clear: when looking at the company's valuation and growth potential, the $1,500 level for Priceline stock doesn't seem unreasonable at all.
Andrés Cardenal owns shares of Priceline Group. 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.