Recent SEC Filing Highlights Priceline's Meta-Search Challenge

Aug.13.13 | About: Priceline Group (PCLN)

Priceline's (NASDAQ:PCLN) recent revenue and earnings beat and its near $1000 dollar stock price have generated a lot of press. You can see samples here, here and here.

Although Priceline's recent performance in Europe is admirable, I believe it tells us little about Priceline's long-term prospects for survival and growth.

I believe a more important factor is how Priceline will navigate the threat and opportunity caused by meta-search services. All Priceline investors should read the most recent 10-Q for its new expanded disclosures on the threat.

Meta-search services - such as Cheapflights.com - aggregate travel search results from multiple travel service providers. Meta-search providers threaten more traditional online travel services because they have the potential to offer more comprehensive search results. According to Priceline's recent 10-Q, meta-search providers may reduce traffic to their website, increase consumer awareness of competitors and increase advertising and acquisition costs.

The meta-search space is heating up. TripAdvisor has started offering meta-search functionality. European meta-search leader Trivago has aggressively entered the U.S. market. Google has launched a meta-search service called "Hotel Finder" that is often placed at the top of its hotel-related search results.

Worse, meta-search providers may continue to evolve to allow customers to make purchases directly through their websites. Priceline's 10-Q discloses that the process is well under way:

For example, TripAdvisor sells room night reservations on its transactional sites Tingo and Jetsetter. To the extent consumers book travel services through a meta-search site or directly with a travel service provider after visiting a meta-search site or meta-search utility on a traditional search engine without using an OTA like us…we may need to increase our advertising or other customer acquisition costs to maintain or grow our bookings…

Priceline moved to deal with the threat by purchasing meta-search provider Kayak earlier this year. But the 10-Q stresses that simply joining the meta-search game won't solve the problem for Priceline's OTA (online travel agency) brand.

To the extent any such consumer behavior leads to growth in our KAYAK meta-search business, such growth may not result in sufficient increases in profits from our KAYAK meta-search business to offset any related decrease in profits experienced by our OTA brands

Indeed, the merger just makes Priceline's competition with other meta-search providers more direct. Far from being a source of strength, Kayak's association with Priceline could materially damage its business model.

As a meta-search service, KAYAK depends on access to information related to travel service pricing, schedules, availability and other related information from OTAs and travel service providers. KAYAK accesses some of its information from ITA Software, Inc., a major flight information software company that was acquired by Google. To the extent ITA, other OTAs or travel service providers no longer provide such information to KAYAK, whether due to its affiliation with us or otherwise, KAYAK's business and results of operations could be harmed and the value of our investment in KAYAK could be adversely affected.

The pressure may come from both Kayak's suppliers and customers. Suppliers competing with Priceline have the ability to stop providing information to Kayak on short notice. Kayak's advertisers who compete with Priceline may choose to reduce or eliminate their payments to Kayak for advertising and referrals.

As Priceline's stock nears $1,000 a share, investors will do well to remember that the price is only retracing the levels it reached more than 14 years ago during the dotcom bubble. That it dropped all the way down to $10 dollars in the aftermath of the bubble reminds investors that Priceline exists in an intensely competitive space prone to creative destruction. At around 30 times earnings versus 17 for the S&P, the competitive advantages the market is paying a premium for can quickly vanish. As outlined in this Barron's article, much of Priceline's growth has come from smart acquisitions like Bookings.com. But growth from acquisitions is temporary. As discussed on the recent earnings call, advertising ROIs are declining. This is exactly what would happen under increased competition, and investors would be wise to watch advertising ROI and operating margin in the future to gauge the effect increased competition is having on Priceline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.