Not quite a year ago, on April 15, 2013, Barron's published a fascinating cover story on the online travel industry, explaining the evolution of the business, what seems to be working and what doesn't and who's winning. The article went a step further and suggested that Priceline (NASDAQ:PCLN) stock, at $743 at the time, could be vulnerable going forward as competitors Expedia (NASDAQ:EXPE) and Orbitz (NYSE:OWW) improved their games.
The same information and a 180-degree change in point-of-view would have made the article perfect. Priceline, as seen above, has crushed the market and the competition since that article. The stock is at $1,277 as I write this. Barron's author, Avi Salzman, is hardly alone. Earlier, in November 2011, here on YCharts, I wondered whether Expedia mightn't be the better investment, given the lofty multiple Priceline was trading at and Expedia's impressive efforts to recast its business.
At best a hollow victory.
PCLN data by YCharts
Oh, sure, Expedia and Orbitz shares outdid the gains in Priceline since that particular point. But Priceline's performance as a company continues to out-pace the industry. And despite its current high valuations - and a recent, minor pullback - it's a freight train you'd have to be either nutty or very brave to step in front of. (Here we see the P/E ratio and forward P/E ratio.)
PCLN P/E Ratio (TTM) data by YCharts
The shorts seem to have gotten that message.
PCLN Percent of Shares Outstanding Short data by YCharts
To understand Priceline, first off, forget William Shatner (although he is awesome), forget name-your-price bidding, forget the U.S. Priceline is essentially these days a foreign hotel booker. Priceline bought a Dutch company specializing in hotel reservations in Europe, Booking.com, in 2005, and that is Priceline today. The international business accounts for 85% of gross booking at Priceline and 94% of operating income, those numbers for 2013. It was a better acquisition than Disney (NYSE:DIS) buying ESPN. Better even than eBay (NASDAQ:EBAY) buying PayPal, given that without the foreign hotel business, Priceline wouldn't be worth discussing.
Most of Priceline's revenue is recognized in the Netherlands, where a special tax rate for "innovative" companies is set at 5% instead of the standard 25%. Overall, Priceline's tax rate was 17.6% in 2013, and it generates buckets of cash on gross margins that would make even a software company blush.
PCLN Revenue (TTM) data by YCharts
What's behind the success?
The U.S. travel market - both airlines and hotels and, more recently car rentals - has become concentrated in the hands of a few providers. Nobody needs help finding a Hilton (NYSE:HLT) or a Hyatt (NYSE:H), a Hertz (NYSE:HTZ) or a Delta (NYSE:DAL). These providers have wisely been squeezing the online and offline travel agent business for years, and redirecting consumers to their own websites.
But that little hotel you stayed at in Le Marais in Paris - what the hell was the name of it? The overseas hotel business is just the opposite of the U.S., highly fragmented and properties needing help in connecting with travelers. Middlemen excel here, none more than Priceline; the excellent Barron's article noted that airline commissions have sunk as low as 2% of ticket price, while some hotels pay as much as 30% of room rates to middlemen. Where would you choose to be?
Expedia and others have belatedly jumped into foreign hotel booking, and competition is certainly increasing. But Priceline is far ahead. Paul Greene, a fund manager at T. Rowe Price (NASDAQ:TROW) and a Priceline fan, told Fortune magazine last month that Priceline is remarkably efficient: it spends less than competitors to attract online traffic and then converts more of its traffic to actual bookings. Being bigger, too, helps because hotels want to be where the traffic is. Success begets success.
PCLN Revenue Per Employee (Annual) data by YCharts
The business is getting tougher. But pulling in $6.8 billion in revenue with just 9,500 employees is remarkable. Revenue per employee has come down and likely will continue to do so. The business, however, is truly a technology operation and enjoys honest benefits from scale as you saw above in the widening gross margins.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times.