Priceline (NASDAQ:PCLN) is a commercial website which claims to help travellers find discount rates for airline tickets, hotel stays and car rentals. The stock has been relatively flat for the last two years as there have been some recent headwinds thanks to increased competition in the travel space, as well as the strong U.S. dollar which has been causing international sales to translate into lowing earnings. Going forward, I believe currency translations will shift from being a headwind to becoming a tailwind, as the U.S. dollar will weaken compared to international currencies. Priceline also has a very strong international presence that will continue to expand, as Asia and Europe look to be huge drivers of earnings growth in 2016, as vacation rates soar in sync with the economy. Priceline is a great company that is showing impressive year-over-year growth, and looks to be undervalued at current levels.
Weakening U.S. dollar to turn into a tailwind for Priceline
Priceline is an international business as nearly 90% of its bookings were from international markets. Since all earnings are reported in U.S. dollars, the earnings have been taking a hit due to the strength of the U.S. dollar compared to other international currencies. Priceline had over $12 billion in travel bookings in Q4 2015, which was a 13% increase over the same quarter the year before. On a constant currency basis, this year-over-year increase is actually 24%, which is a very impressive increase in travel booking over the course of one year. There is no doubt that Priceline still has very strong growth, and the currency translations look to have suppressed the true growth the business was experiencing. Looking forward, the Fed taking a more cautious stance on raising interest rates, thus we may see the U.S. dollar finally weaken in comparison to other currencies. This is fantastic news for Priceline, considering how much of its revenues come from global sources. The currency translation will turn into a tailwind from a headwind, as many pundits believe the U.S. dollar has peaked, and may weaken substantially compared to various international currencies.
International expansion to be a driver for forward earnings growth
Priceline reported very strong year-over-year growth in the last quarter. Priceline hotel room night bookings increased 27% year-over-year, with gross profit jumping 23% on a constant currency basis during Q4 2015. Priceline manages to generate a fantastic 35% operating margin during 2015, which is very impressive for a company trading with a 25.8 P/E ratio and an absurdly cheap 0.8 PEG ratio. The airline ticket sales dropped 3% to $1.7 million last quarter, which is due to a slowed global economy, Europe in particular which accounts for around 66% of Priceline's revenue last year. Going forward into 2016, as Europe recovers from its weakness, Priceline will continue its very impressive expansion to be able to offer even more locations via Booking.com.
Priceline has a very solid position in Asia as well, which is a huge growth area for Priceline. Priceline owns Agoda.com, which is one of the top travel websites, as well as a 15% stake in Ctrip (NASDAQ:CTRP), which is China's number one travel agent. These two Asian assets when combined with Booking.com's 41,000 Chinese hotels, makes Priceline a force to be reckoned with, as China is one of the biggest populations in the world, and when the Chinese economy gets strong again, they will look to online to Priceline's assets, as according to Phocuswright research, nearly 25% of the online travel market came from the Asian Pacific region. Look for Priceline to continue its acquisition spree, as it continues to find great travel agents all over the world. Priceline truly is an international business, and international growth with definitely be drive earnings in the near future.
Risk: Airbnb will be a huge threat to Priceline in the long-term
Airbnb is a huge risk to Priceline's long term growth, although Airbnb is a private company, the Wall Street Journal states that Airbnb will finish 2015 with a whopping $900 million revenue. Currently, Airbnb is available in over 34,000 cities, with over 2 million listings around the world. Airbnb has become increasingly popular among millenials as a way to either save money, or experience something completely different from a vacation stay. Airbnb has very huge growth, and may steal long term market share away from Priceline despite its huge moat. Airbnb does specialize in a different niche than Priceline, but Airbnb will erode Priceline's massive moat by becoming the go to choice for vacationers. This will put Priceline's margins under tremendous pressure, as they are forced to lower their discount rates further in order to gain market share back.
Priceline's largest platform, Booking.com reported an increase 34% in its offerings last year, as it now offers over 850,000 hotels to more than 200 countries around the world. This is by far the largest offering of any travel website out there, and this is what gives Priceline a huge moat that will be difficult for competition to erode. Expedia (NASDAQ:EXPE) currently offers only 269,000 hotels on its website, which is less than a third of Priceline's current offerings. As Booking.com continues to expand its offerings, I believe it will be able to attract more customers worldwide, as customers want to go to one site, and get the lowest rate for all their vacation plans. The online travel booking is a $1.3 trillion market, and Priceline is the market leader. Going forward, Priceline will continue to expand its number of offerings, thus solidifying its moat and driving out the competition in the online hotel and flight booking market. I believe Priceline will be able to continue to drive growth in its hotels, and airlines business, as they receive a much needed boost to their earnings by a weakening U.S. dollar. However, despite all these short to medium term tailwinds, I believe the threat of Airbnb, which is growing rapidly, will become a major long term threat that will stunt Priceline's growth. Airbnb is a different, cheaper way to book a vacation, as their growth rate was at 100% in 2015. Airbnb is a real risk for Priceline in the long term, and their growth is Priceline's loss. Trade Priceline for the short term tailwinds, but be cautious, as the long term growth looks to be in jeopardy.
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