Priceline (NASDAQ:BKNG) stock is one of the most profitable positions in my portfolio; shares of the online travel operator are up by more than 275% in the last five years. After such an impressive performance, many investors might feel inclined to take profits, but that could be the wrong move. Winners usually keep on winning over the years, and I'm planning to hold on to Priceline stock for the long term.
A top-quality business
Priceline is the global leader in online travel services, the companies that provide hotel bookings, car rentals, and flight reservations online. Priceline's closest competitor is Expedia, 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 is expected to produce $9.24 billion in sales during 2015, versus $6.52 billion in forecasted sales for Expedia.
The company 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. There is almost no associated cost of inventory for Priceline, and the business model is remarkably profitable: The company retains nearly 35% of revenue as operating profit.
Size is a crucial advantage in the business since both travelers and industry operators want to go with the online platform offering more opportunities -- a bigger platform is also a more valuable one. According to financial reports for the second quarter of 2015, Priceline's Booking.com platform features 707,000 hotels and other accommodations in 220 countries and territories, up 35% year over year.
Rock-solid financial performance
Priceline has a big presence in Europe. This is a key strategic advantage over the long term since Europe is a major travel destination for both business and tourism. However, a weakening euro is hurting Priceline's financial performance when measured in U.S. dollars. That's no reason to fear, though; the company continues delivering vigorous growth in spite of currency headwinds.
Gross travel bookings, the total dollar value of travel services purchased by customers across Priceline's platforms, were $15 billion during the second quarter, an increase of 11% over the same period in 2014. However, growth in constant currency was much more impressive, with gross bookings jumping by 26% annually.
Performance was quite healthy across different segments, especially in hotel reservations and car rentals. Priceline registered 113.1 million hotel room nights during the quarter, an annual increase of 26.2%. Car reservations jumped by 20.1%, to 17.1 rental car days, while airline tickets increased by a much more moderate 0.3% year over year.
The company is also doing great in mobile, a crucial growth area in the industry. Nearly one third of all bookings across Priceline's platforms are now happening on mobile devices, and management believes the business is on track to generating over half of bookings via mobile in two or three years.
Even the best companies can be lousy investments if the price is too high. Fortunately, Priceline stock is still trading at very reasonable valuation levels. When looking at ratios such as enterprise value to EBITDA, price to free cash flow, and price to earnings, the current valuation is roughly in line with historical averages for the company.
Priceline stock is trading at a forward P/E ratio in the neighborhood of 20 times earnings forecasts for 2016. That's a moderate premium versus the overall market; the average company in the S&P 500 index trades at a forward P/E ratio around 18.
Still, this is fairly reasonable for a company with such a compelling business model and delivering impressive financial performance. After all, a superior business deserves a superior valuation, and Priceline has delivered huge gains for investors while trading at above-average valuation levels over the years. At current prices, Priceline stock still offers abundant room for gains in the years ahead.