Priceline (PCLN) is the world's biggest online travel agency (OTA) with a market capitalization of ~$33 billion. The company owns leading web properties booking.com, priceline.com, agoda.com and rentalcars.com and provides online travel services in over 180 countries. Most of the company's revenues and profits come from online hotel reservations, while the rest is contributed by airline and car rental bookings. The company recently acquired leading travel meta search website Kayak.com for $1.8 billion to consolidate its position as the global No.1 OTA. The company has acquired other leading OTAs like Booking.com and Agoda.com in the past. Priceline has been the best performing Internet stock in the past few years even outperforming Amazon (AMZN). The company has grown its revenues and earnings at an awe-inspiring pace with the EPS growing almost 6x from $3.69 in 2007 to $21.27 in 2011. There is very little not to like about Priceline given its history of rapid growth with improving margins. However, we have outlined some of the major competitive risks Priceline faces from bigger technology rivals.
Global footprint - Priceline has grown at a rapid pace internationally unlike other peers like Expedia (EXPE). The company has made strategic acquisitions in Europe and Asia (Agoda.com) to expand into newer geographies. Despite a global economic slowdown, Priceline has still managed to grow impressively in the last couple of years.
Benefiting from Secular Growth in OTA industry - As travel bookings move more and more online, OTAs are benefiting from this strong secular growth in the industry. While the developed markets have largely shifted online, emerging markets still have a long way to go.
Impressive Acquisitions - Priceline has acquired smaller travel companies aggressively to enter newer markets. The company has managed to integrate the acquired companies quite competently. It has also not made unrelated acquisitions concentrating largely on the travel space.
Stunning Margin Growth - Priceline has grown margins at a stunning rate with operating margins increasing almost 10 times from 3.7% in 2005 to 32.1% in 2011.Free cash flows have grown at a more impressive pace, increasing by almost 25 times to $1.3 billion from $52 million in 2005.
Solid Balance Sheet - Priceline has got a solid balance sheet with net cash of ~$3 billion, which accounts for almost 10% of its market capitalization of $33 billion. The company generates more than a billion dollars in cash from its core travel business which it has judiciously used by acquiring smaller companies.
a) Competitive Threats from Search Providers - We think that Priceline faces rising risks from the technology giants such as Google (GOOG), Microsoft (MSFT) and Facebook (FB). Google is trying to get into the online travel space, acquiring leading travel data provider ITA Software for $700 million. A lot of the travel inquires are redirected from search websites to OTAs. Google and Bing have been increasing their focus on the travel vertical, providing more travel data than simply links to travel websites. With search getting increasingly sophisticated and the search providers muscling into their customers' domain, we think that Priceline faces a big threat. Facebook has not made any major moves into the travel vertical, but the company is desperately trying to increase revenues by monetizing its 1 billion user base. It is not inconceivable that Facebook uses the travel data of its users to start providing OTA services to its members.
b) Dependency on Hotel Bookings for most of its revenues - Priceline depends on hotel bookings for most of its revenues and profits. No large Internet company is dependent on a single source for such a large percentage of revenue and profits. While Google and Amazon depend on search and online retail for most of their sales, these companies are diversifying into a number of other technology sectors such as smartphones, cloud computing etc. While management focus on a single business area is a good thing, we felt that for PCLN it might make sense to use its huge cash flows to enter into other areas.
c) Supplier Threat - Besides competitive threats from other OTAs and search providers like Google, PCLN also faces competitive threats from its own suppliers. Consumers can directly book hotels and flights from the vendor's website instead of going through Priceline. As web and payment technology gets more sophisticated and widespread, hotels and airlines will be able to provide a better user experience eliminating the middleman.
Valuation is not too Cheap nor Expensive
Priceline's valuation is not expensive at ~15.8x forward P/E, however, the P/S and P/B at 6.8x and 9.3x seem expensive. But the reason for the high values is that Priceline has very high net margin at 27%. The company has grown at an astounding pace over the last few years far outpacing its OTA rivals like Expedia and Orbitz (OWW) through a mix of organic and inorganic growth. Priceline has a very strong international footprint in addition to its dominance of the US online travel market. The company is expected to keep growing profits at a ~20% annual rate in the future. With more and more Asian and European users moving their travel needs online, PCLN has a huge addressable market to tap into.
Stock Price Performance
Priceline stock has given a stunning 593% return over the past 5 years significantly outperforming all the other OTA stocks as well as other best performing technology stocks like Amazon. However, over the last year, the stock has underperformed though the absolute return of ~38% is still impressive. The stock has been a multi-bagger, increasing in price from ~$100 in 2008 to $660 now. After touching an all time peak of ~$775, the stock has pulled back by ~15%.
Priceline remains a dominant force in the global online travel industry. The company has kept growing through a judicious mix of organic and inorganic growth. The stock is not too cheap but not expensive either. The company faces growing competitive threats from both new and old competitors. Bigger technology companies are trying to muscle into the large and profitable OTA space. Even in emerging markets like India, there are a number of local home grown players that have already established a leading presence. PCLN revenues are still a small percentage of the overall global travel spend which means that the company still has a big space to expand into. The company has grown at an Amazon like pace but with margins that are similar to Apple (AAPL). We don't think that Priceline will give the same superlative returns as in the past, but seems poised to give market beating returns in the future.