Priceline Group Inc Stock Looks Undervalued: Buying Opportunity or Time to Run?

Source: Priceline.

Priceline (BKNG -0.51%) stock has been languishing over the last year, falling by 8% in the last 12 months because of investors' concerns over a depreciating euro and its impact on Priceline's big European business. However, external conditions come and go, and Priceline is still a remarkably attractive business trading at a convenient valuation, so chances are, temporary weakness will turn out to be a buying opportunity for investors in Priceline stock.

Fasten your seat belts
Priceline is the global leader in the online travel industry, meaning companies that allow travelers to book accommodations, plane tickets, and car rentals via web and mobile applications. The company's main competitor is Expedia (EXPE 0.23%), which has a bigger presence in the U.S., but Priceline leads the industry by a wide margin on a global scale.

Priceline produced $13.8 billion in gross bookings during the first quarter of 2015, and $12.1 billion of that money came from international markets. The business generated $1.7 billion in gross profits, with $1.4 billion -- or 82% of the total -- coming from outside the U.S. Expedia, on the other hand, brought in nearly 60% of gross bookings and 56% of revenue from the U.S. during the last quarter.

Priceline's international exposure is a big plus for investors with a long-term horizon. On the other hand, many international currencies have been depreciating against the U.S. dollar lately, especially the euro reacting to the Greek debt crisis, and this is weighing on Priceline's performance.

Gross travel bookings grew 12% when measured in U.S dollars during the last quarter, so performance was still pretty strong. But gross travel bookings in constant currency grew at a much more impressive 26% year-over-year rate. The same goes for profits: Gross profit during the last quarter jumped by 19% in U.S. dollars, and by a much more exciting 32% when measured in constant currency.

While Priceline is still delivering solid performance across the board, the fact remains that currency fluctuations are putting considerable weight on the business, and this is a major source of uncertainty over the middle term.

The long-term view
Priceline is a textbook example of a company benefiting from the network effect, meaning the business grows stronger as it gains size. Hotel operators and other service providers want to go with an online travel platform offering access to a big amount of potential customers, and more travel options are also a major advantage for travelers. This means travelers and industry operators attract each other to the platform, and the service becomes more valuable to both parties over time.

Priceline's Booking.com hotel reservation platform ended the last quarter with more than 635,000 hotels and other accommodations, an increase of 40% over the same quarter in 2014. This says a lot about Priceline's competitive position in the promising online travel business.

Also, the company makes most of its business via the agency business model, meaning the company earns a commission on every transaction, as opposed to buying inventory from operators and then reselling it to travelers. This business model is enormously profitable and has low capital requirement needs, allowing Priceline to produce an operating margin of more than 35% of sales on an annual basis.

On price and opportunity
It's hard to tell how long it may take for macroeconomic conditions in the eurozone to improve -- or how much damage a depreciating euro can cause on Priceline's business over the coming months. But the fact remains that currency fluctuations are an external and transitory factor, so long-term investors may want to take these concerns with a grain of salt.

While currency headwinds may drag on performance in the short term, Europe is still a major travel destination attracting tons visitors from all over the world, and Priceline is in a position of strength to continue benefiting from growing demand for online travel services on a global basis for years to come.

The price tag looks quite convenient for such an attractive business. Priceline stock is currently trading at a forward P/E ratio near 17, roughly in line with the average forward P/E ratio for companies in the S&P 500 Index, in the neighborhood of 18.

Being the global leader in online travel services, chances are, Priceline will materially outgrow most other companies in the index, with or without currency headwinds on the horizon. This means the company could easily justify a higher valuation over time, so current price levels could offer an attractive entry point for opportunistic investors in Priceline stock.