Priceline (NASDAQ:BKNG) stock fell as much as 6.5% on Thursday morning, as investors reacted negatively to the company's Q1 2015 earnings report. Foreign currency fluctuations are hurting the company, and big investments in marketing and advertising are depressing its profit margin. However, from a long term point of view, Priceline looks remarkably solid.
The business is growing nicely
Gross travel bookings, meaning the total dollar value of travel services purchased by customers, were $13.8 billion during the last quarter, an increase of 12% over a year ago. The strong U.S. dollar was clearly a considerable headwind, since gross travel bookings in constant currency grew at a much more impressive 26% year over year rate.
The company produced most of its gross bookings in international markets, accounting for $12.1 billion in gross bookings during the quarter. This represents a year over year increase of 13.7% in U.S. dollars and a much stronger growth rate of 29% in constant currency. International gross bookings even accelerated versus a 27% increase in constant currency during the fourth quarter of 2014.
On the other hand, growth in the U.S. is clearly disappointing. Priceline produced $1.7 billion in U.S. gross bookings last quarter, an annual increase of 2.1%.
Priceline booked 104.6 million hotel nights across its platforms, establishing a new record for the company and growing by 25.4% versus the first quarter of 2014. Booking.com continues consolidating its leadership position in the online hotel reservations business, extending its presence to more than 635,000 hotels and other accommodations on the platform, an increase of 40% over last year.
Investing in marketing and advertising
Total sales during the quarter were $1.84 billion, an increase of 12% versus $1.64 billion in the same period last year. The number came in ahead of the $1.8 billion in total revenue forecast on average by Wall Street analysts.
Gross profit was $1.67 billion, a healthy year-over-year increase of 19% in U.S. dollars and an even stronger growth rate of 32% in constant currency.
Priceline is aggressively investing in marketing and advertising, and this is taking its toll on profitability. Total operating expenses grew 28% year over year, increasing at a faster rate than revenue and eroding its profit margin. Operating margin was 23.6% of sales in the last quarter, down from 26.7% in the same period last year.
The company reported $8.12 in adjusted earnings per share during the quarter, an increase of 4% versus the same quarter in the prior year, and above Wall Street forecasts of $7.72 per share.
Guidance looks quite uninspiring, as management said it's expecting gross travel bookings to be between flat and a 7% increase in the second quarter. This is incorporating a big negative impact from currency fluctuations, since the projected increase in constant currency is much stronger, at 15%-22%.
In any case, Priceline is well known for providing conservative guidance, as management tends to under-promise and over-deliver. If history is a valid guide, the company will easily beat its own guidance, so investors should probably take these numbers with a grain of salt.
When adjusting for currency fluctuations -- which are of course external factors that the company can't control -- Priceline is still growing at a vigorous speed. Investments in marketing and advertising are hurting its profit margin, but that's not necessarily a bad thing from a long term-point of view. When done smartly, investments in this area can drive revenue growth for years into the future. Also, it's important to keep in mind that Priceline remains a remarkably profitable business.
Competitor Expedia is increasing its advertising spending too, and Amazon.com is broadening its presence in online travel with Amazon Destinations, an online travel platform specially targeted toward local deals. Considering that competitive pressure is on the rise, Priceline's management is doing the smart thing by increasing investments in marketing and advertising to strengthen Priceline's position in the promising online travel business.
Looking at Priceline stock with some perspective, the big decline after earnings doesn't seem very justified, and it may easily turn out to be a buying opportunity for investors with a long term horizon.