How priceline.com Stacks Up

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: priceline.com (Nasdaq: PCLN). Is this online travel agent the real thing? Let's get right to the numbers.

Foolish facts

Data current as of Dec. 11.

Not many Fools are willing to go on the record about why they like or dislike priceline.com. Only 11% of those who've rated the stock in CAPS have explained their stance in a pitch. But those who've gone on record aren't shy about their feelings.

"I want to own this stock. It is hard to get them cheap. Good international expansion, and they are doing well domestically too. Captain Kirk rules," wrote my Foolish colleague Tom Engle. You might know him as TMF1000.

He makes a good point about international expansion. Last year, roughly 64% of priceline's revenue originated in the United States. Four years ago, 84% of the company's revenue derived from domestic bookings.

And whether or not you like William Shatner as priceline's Negotiator, we can all agree that the Falcon of Truth offers a burst of comedic marketing genius, right? What some Fools don't like is priceline's valuation.

"I just don't see the numbers to support a $9-plus billion market cap. Sales are less than $2 billion. What gives? Growth has been good, but the valuation is just plain ridiculous," All-Star CAPS investor greenwave3 wrote a little more than a year ago.

With the stock trading for 49 times the last 12 months' worth of normalized net income -- his short call remains open. Is that the right move? Time to dig into the numbers.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

How can anyone bet against a company performing this well? Sure, growth has to slow some time, but there's no evidence it will happen soon. Let's review:

• Normalized net income growth has accelerated over the past three years even as revenue continues to grow at a brisk pace. The increasing gap between revenue and profit growth suggests leverage in the underlying business, exactly what we like to see as growth investors.
• Excellent cost management could be what's giving priceline.com leverage. Gross margin has improved by almost 10 percentage points in two years. Return on capital is up more than 8 percentage points over the same period.
• Shares outstanding are up 19% over the past two years, but earnings have grown so much faster that investors have enjoyed a six-bagger over the same period.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 11.

There are some great businesses in this table. Google is more like Travelzoo in providing deal alerts than bookings, but you'd still be hard-pressed to find an obvious growth stock that's as cheap or well-diversified.

By contrast, Ctrip.com's growth story may be just beginning. The rising Chinese middle class isn't yet used to the idea of leisure travel, and an increasing number of foreign travelers rely on Ctrip to aggregate and present the best air and hotel deals. Think of it as China's answer to priceline.

Grade: Sustainable
A global world needs more travel aggregators, but priceline is moving so fast and is so well-funded that I think the company is best positioned to provide these services in most regions of the world.

Valuation is all that's holding me back from buying the stock outright. Yet there's no need to hurry; a volatile market should offer an entry point on a pullback, which I'm willing to wait for. I've added the stock to my CAPS watchlist in anticipation of that day.

Now it's your turn to weigh in. Do you like priceline.com at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email or replying to me on Twitter.

Interested in more info on priceline.com? Add it to your watchlist by clicking here.