Before we proceed, I want to remind readers that not all companies, no matter how good they are, make investors money. In order to make money, you have to buy at the right price and many times at the correct time. And also, many times you have to go against the herd.
Let's start with Priceline. As per the company's Q3 release:
Third quarter gross travel bookings for the Group, which refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by consumers, were $7.8 billion, an increase of 25.2% over a year ago (approximately 34% on a local currency basis).
The Group had revenues in the 3rd quarter of $1.7 billion, a 17.4% increase over a year ago. The Group's international operations contributed revenues in the 3rd quarter of $1.2 billion, a 30.6% increase versus a year ago (approximately 42% on a local currency basis).
The Group's gross profit for the 3rd quarter was $1.4 billion, a 26.9% increase from the prior year. International operations contributed gross profit in the 3rd quarter of $1.2 billion, a 30.6% increase versus a year ago (approximately 42% growth on a local currency basis).
The Group's operating income in the 3rd quarter was $756 million, a 22.6% increase from the prior year. The Group had GAAP net income applicable to common shareholders for the 3rd quarter of $597 million, or $11.66 per diluted share, which compares to $469 million or $9.17 per diluted share, in the same period a year ago.
Overall, a very good quarter and a bit better than the market expected. However, as with most good stocks in this market, this stock is not cheap by any metric. Current PE is 26 and forward PE 18. The Price/Sales is 6 and Price/Book is 10.
Yes, this is a good growing company, but it is also a fully valued company. The CEO had this to say in the current release:
Looking forward, Mr. Boyd said, "While we remain concerned about economic weakness across Europe, Asia and the U.S., the Group intends to focus on solidifying its position as the world's largest and most profitable online hotel reservation service by continuing to add hotels and other accommodations and better servicing our customers through constant innovation in our mobile and desktop sites."
The key words here are "While we remain concerned about economic weakness across Europe, Asia and the U.S.," which basically means all over the world. And that is the problem when paying full price (let alone a premium) for any stock. The chances that something might go wrong are just too high, especially when we are talking about a company that makes most of its money outside the U.S.
The stock has broken the recent downward trend to the upside, where it made a pretty big correction from the peak of $775. My opinion is that, while this stock might go up a little more, it will not go beyond the recent high. It is simply too expensive of a stock for that to happen in this environment. So If I had this stock, I would sell it if it approaches $775.
Now let's have a look at TripAdvisor . As per the company's Q3 release:
Revenue for the third quarter increased to $212.7 million, up 8% quarter-over-quarter and up 18% year-over-year.
Net income for the third quarter increased 12% quarter-over-quarter and increased 9% year-over-year to $59.4 million, or $0.41 per diluted share.
Non-GAAP net income for the third quarter increased 12% quarter-over-quarter and 12% year-over-year to $65.8 million, or $0.46 per diluted share.
Adjusted EBITDA for the third quarter increased 10% quarter-over-quarter and 15% year-over-year to $107.1 million, or 50% of revenue.
Cash flow from operations for the third quarter increased 24% quarter-over-quarter and decreased 2% year-over-year to $76.5 million, or 36% of revenue.
Free cash flow for the third quarter increased 24% quarter-over-quarter and decreased 4% year-over-year to $69.1 million, or 32% of revenue.
The results are certainly good, but not impressive. And by no means do these results justify the 20% pop this stock did on Friday.
Valuations for TripAdvisor are along the lines of Priceline with a trailing PE of 27, and a 20 forward PE, Price/Sales of 6, and Price/Book of 6.
Taking into account the risk of an expensive valuation, I don't think investors have made much money over the past 2-3 years in this stock. I mean if you bought this stock in the beginning of 2010, you only made about 20% before Friday's pop.
On that note, the stock has changed direction and broke up from its current downturn. It is also impressive to note the current correction, when it dipped from the current high of about $47 to $30. Personally, this is more volatility than I can handle.
These are two very solid companies. Both of these stocks have solid balance sheets and they are leaders in their sectors. However, these stocks are also fully priced. And fully priced means that many things can go wrong if for some reason, some kind of an accident happens along the way and situations and circumstances change.
Having said that, however, both of these companies have proven that they are both resilient and can innovate their way around global potholes.
But valuations in my book are the Alpha and the Omega. And my line in the sand is a high PE, a pie in the sky Price/Sales and Price/Book number. And looking at the global landscape a little, there are simply too many things that can go wrong that can change matters for the worst for both companies.
I am going to take a contrarian view once more as I have done on Apple (AAPL) (please read my takes here). As such, while these are great companies, they are simply too expensive to make any real money from these levels for investor who buy today. I mean, if someone wants 20% growth for the next two years or so, why not buy Apple?
I would only buy these companies if they were to correct to the tune of 30% or more. Yes maybe I am asking too much; however, I never pay top dollar for any stock. And while not paying too much and being a contrarian sometimes is not popular, it is my style of investing. And it is a style of investing that has served me all too well all for many years.