Priceline.com Inc.'s (PCLN) stock price has been the talking point on Wall Street on two different occasions. The stock once stood as a reminder of the infamous Dotcom bubble and its following burst. The stock gained over 100% in the month of April 1999 reaching a peak price of $974 on April 30th. The months that followed brought misery to Priceline investors with the stock price plummeting by $967 to reach a price of $6.75 on December 26, 2000.
(click to enlarge)
Source: Yahoo Finance closing price (adjusted for dividends and splits)
The decade that followed has been a stark contrast to those 18 months and has seen Priceline rise to be one of the most efficient generators of value and the stock has once again become the talking point on Wall Street as its stock price has moved close to the $1,000 mark. However, we believe that this time around the stock is here to stay, and not to fade away like it had done before. The stock's rally in 1999 was due to the buzz surrounding "Dotcom" companies whereas the stock's current rise has been on the back of a very efficient business model and phenomenal business performance. The stock has not disappointed the bulls, registering gains of over 60% in the year to date. However the huge gains have raised questions about further upside potential from this stock.
The most obvious question now is whether it is time to book some profits? While there might have been an opportunity for short term profit booking when the stock rose sharply to levels of $1,050 in the week ending Oct 4th, what we are interested in is the long-term potential of this "promising" stock.
Looking at the fundamentals, the company has had a phenomenal run irrespective of the lens you analyze it through. If growth is what you value, Priceline has been leading that metric in the online travel industry. If earnings are what you value, Priceline is one company which will top your charts. It is not without reason that the company's stock has become the first technology stock to hit the $1,000 mark at a Price to Earnings (P/E) multiple which we call "acceptable." The chart below summarizes the current valuation of Priceline vis-à-vis its nearest competitors by revenues.
Priceline is the fastest growing company among the top 5 online travel companies. In terms of revenue growth, the company comes in marginally ahead of Ctrip.com International's (CTRP) 30% average growth rate over the last three years. However, these numbers for Priceline begin to look extraordinary when you consider the fact that Priceline's revenues are more than 7 times the revenues managed by Ctrip.com. Expedia (EXPE), Priceline's nearest competitor by revenue, has managed to grow its revenues at half the rate of Priceline.
The current growth at the firm is primarily driven by its international operations as the growth rate of the international online travel market exceeds the growth rate of the online travel market in the United States. Priceline anticipates the growth in international operations to continue to outpace its domestic operations, a trend which will drive the growth over the coming quarters. The gross bookings from the company's international operations grew by 44% Y/Y during Q2 2013, with total gross bookings growing at 38% Y/Y. We expect the international operations to keep the topline growth at the company well over 20% Y/Y in the coming quarters, which is a very conservative estimate, even considering that the growth at the firm will slow as the size of the revenue base continues to increase.
Priceline has higher profit margins than every other competitor in the industry, with the exception of Tripadvisor (TRIP), which has marginally higher margins than those of Priceline. However the marginally higher margins of Tripadvisor have come at a cost to its topline growth. Tripadvisor has revenue growth of just over 19% which pales in comparison to Priceline when we consider that Tripadvisor's revenues are less than even 15% of Priceline's revenues.
A fast growing topline combined with high profit margins leads to rapidly growing earnings. This is exactly what is reflected in column 4 of the table above. The fact that Priceline has grown its earnings at a significant pace has allowed the stock to remain attractive even at price levels close to $1,000.
One look at the last twelve month price-to-earnings (LTM P/E) multiples of the companies above, and it becomes clear that Priceline is significantly undervalued vis-à-vis its competitors. The average LTM P/E, based on Oct 9th closing prices, was just over 48 for the online travel industry. Priceline suddenly appears to be comparatively cheap even after the phenomenal gains the stock has given the year-to-date. The stock registered a gain of over 66% in the first nine months of 2013.
Having established the fact that Priceline has outperformed its peers over the last few quarters we shall now take a look at what we believe is the intrinsic value of the stock. Our conservative estimates of the company's 2014 EPS is $40, a number many will find too conservative considering that the company's earnings have grown at an average rate of over 35% in the last three years. Using our estimated earnings for year 2014, we get a forward P/E multiple of 24.73. This is significantly lower than the current P/E multiple of Priceline, which was 32.49, as of Oct. 9th. We then apply a P/E multiple of 30 to arrive at the target price of $1,200 for Priceline. We believe this is the intrinsic value of the stock, on a very conservative basis considering the current multiple of the company and also the average industry P/E multiples. The details of our calculations and assumptions are listed in the table below.
A note of caution to investors is that over the next week the market will continue to be volatile as the debate regarding the debt ceiling heats up in Washington. However, we do not see that impacting the fundamental performance of Priceline. While the market in general will be subject to happenings in Washington over the short term, the long-term potential of Priceline is not something that will be on the radar over the next week.
We continue to believe that the stock has significant potential in the long term even though the stock gained close to 8% in the month of September. Priceline stock price closed the last trading session (Oct. 9) at a price of $989.03, registering a loss of 7.34% in the last 5 trading sessions. We believe that the latest pullback in the stock price is an opportunity for potential investors to benefit from the stock's movement to its intrinsic value over the next year and a half.
Additional disclosure: The article was written by Virendra Singh, Equity Analyst at Amigobulls.com. Amigobulls Mediatech Pvt. Ltd. is not receiving any compensation for this article (other than from Seeking Alpha). Amigobulls Mediatech and Virendra Singh do not have any business relationship with any of the companies mentioned in the article.