Setting high expectations can get a company in trouble, and that's a lesson that online travel giant Priceline Group (NASDAQ:BKNG) can learn from this quarter. In its previous quarterly report, Priceline predicted the strongest performance ever, and coming into Monday's release of its third-quarter financial report, Priceline investors wanted to see not only blockbuster results but also signs that the success would continue well into the future. Yet when Priceline followed its more typical script of downplaying its future expectations, traders went into a panic, sending the stock sharply lower. Let's take a closer look at Priceline's latest results to see whether long-term investors really have any good reason to worry.
Priceline delivers solid results
Priceline's third-quarter results looked impressive by most accounts. Revenue jumped more than 9% to $3.10 billion, topping the consensus forecast among investors by about $50 million. GAAP net income climbed almost 13% to $1.20 billion, and after allowing for a variety of extraordinary items, adjusted earnings of $25.35 per share outperformed what investors were looking to see from Priceline by more than $1 per share.
Fundamentally, Priceline's numbers showed how successful the travel giant has been at overcoming the continuing impact of a strong U.S. dollar. Gross travel bookings came in at $14.8 billion, but on a constant currency basis, growth in that figure would have been 15 percentage points higher. The hotel business once again led the company higher, with record bookings of 116 million room-nights representing a 22% rise from year-ago levels. The company's Booking.com built up its portfolio of properties on offer to more than 820,000, 38% higher than 2014's third quarter, and the service now has more than 21 million rooms to offer.
A closer look at Priceline's three main segments showed the same trends that we've seen for several quarters now. Revenue from advertising jumped 30%, slowing its past growth pace but still leading the company forward. Agency revenue growth accelerated to 12%, but the merchant business once again saw a slight decline of around 3% in its sales.
CEO Darren Huston boasted about Priceline's successes. "The Group's mission is to help people experience the world," Huston said, and "we continue to be the most valuable platform in the world exclusively dedicated to this pursuit." The CEO said that the company would keep investing in a smart manner to sustain growth going forward.
Priceline returns to its pessimistic guidance strategy
Yet what sent the stock sharply downward was Priceline's guidance, which reverted to its typically downbeat tenor. For the fourth quarter, Priceline expects that gross travel bookings will only grow 1% to 8%, due to a 12 percentage point hit from the strong dollar. In particular, weakness in the U.S. market will send gross travel bookings domestically down 5% to 10%, and revenue growth of 1% to 8% would be a considerable letdown compared to the 11% growth that investors want to see. Similarly, adjusted earnings of $11.10 to $11.90 per share would compare quite unfavorably to current consensus forecasts for around $12.40 per share.
Those who've followed Priceline for a while, though, understand that this is part and parcel of the travel giant's overall behavior in dealing with shareholders. In fact, last quarter's optimism in giving future guidance was the real outlier for Priceline investors. Typically, the company's earnings reports involve beating past guidance for the recently concluded quarter, and then issuing new guidance for the current quarter that's below the consensus forecast among those following the stock. Throughout the course of the quarter, investors get more optimistic as the company outperforms its lower guidance -- only to repeat the process again in the next report.
Still, Priceline investors shouldn't dismiss concerns entirely. Competitors have ramped up their own efforts in the space, and Expedia (NASDAQ:EXPE) in particular reacted favorably to its own earnings announcement, in which it showed how its acquisition of Orbitz helped cut costs more than expected. At the same time, Expedia's aggressive move to buy nontraditional accommodation company HomeAway ups the stakes for Priceline, which will need to figure out whether it should respond to Expedia's purchase with an acquisition of its own or simply keep following its own strategy.
Traders in Priceline stock reacted negatively to the guidance, sending the stock down 6% after the announcement. In the long run, though, Priceline investors can see this as just another repetition in the cycle that the stock has followed countless times in previous quarters, and they should remain focused on the company's solid fundamentals going forward.