Priceline (PCLN) presents an interesting opportunity for the long term investor. The business has been achieving strong rates of growth for an extended period of time, and delivering excellent margins and returns on invested capital, yet all shareholders have seen in recent months has been a shareprice that's been in freefall. Priceline has declined almost 17% since the beginning of the year. The business now trades at share price levels which investors saw in mid 2013. Yet Priceline is a much better business than in 2013, with revenues and operating profits that are 30% higher .
Brand perception and inventory depth drives moat
I like dominant businesses with natural barriers to entry that help ensure long-term profitability. Priceline has the characteristics of a wide moat business. The company benefits from the broadest range of listed properties available for booking, and is a name and destination that is synonymous with travel booking. That makes it top of mind for consumers looking to book travel.
Profitable high margin business with strong cash flow
The thing I love about Priceline is that the business moat keeps progressively expanding. Priceline has always been a high margin business. However these margins have been progressively expanding over the last few years. Incredibly, gross margins have doubled in less than a decade and now stand at 90%. Operating margins have also shown a similar level of expansion and stand at close to 35% today. The combination of margin expansion , plus a rapidly increasing topline have resulted in a business that has grown EPS more 10x in the last decade. Priceline is not just a business with a high level of profitability. The company also manages to produce significant levels of cash. Priceline manages to convert between 25-30% of revenue into free cash flow.
Priceline's dominant economics
