Priceline: Brussels Impact Should Be Minimal

| About: Booking Holdings (BKNG)
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Summary

Priceline and other travel plays have pulled back modestly after Brussels bombing incidents.

Any earnings impact from these events is likely to be moderate and not impact earnings materially.

Strong revenue drivers should propel Priceline higher over the coming years.

Priceline (PCLN) has pulled back some 4% since the Brussels bombings took place last week. While this appears to be a fairly muted response, the question arises whether back to back terrorist events in France and Brussels in a short space of time may subdue activity in the European travel market, which Priceline has particularly strong exposure too.

Priceline has recovered remarkably well off lows that it reached earlier in the year. The company has bounced almost 30% from the mid-February low's that took the stock under $1000. The recent spate of terrorist activity in France and Brussels naturally give rise to concerns around how booking activity in Europe may be impacted. With a strong presence in the European market courtesy of Bookings.com, Priceline will feel the impacts of any pronounced slowdown.

Priceline's Q4 results gave some indication of the likely reaction from travelers to the recent terrorist activity. In Q4 commentary, the company noted that global room night growth rate declined by more than 10 percentage points for a two- to three-week period after the terrorist attack in Paris compared to what it had been before the attack. However growth eventually bounced back strongly in December, such that the company closed out the quarter with international bookings up 15% year on year.

I would expect that Priceline will see a similar negative impact on bookings over the next few weeks as holiday makers rethink travel plans to Europe, but that once again, this effect should be negated after a few weeks. Any further pullback in Priceline stock as a further reaction to the recent events in Brussels should be considered an opportunity to buy Priceline stock.

Priceline's most recent quarterly results also gave a good indication of a business that continues to see strong momentum. While the US business is seeing negative momentum and a year on year decline in bookings, Priceline's international momentum continues unabated, with only the strong US dollar holding the business back.

Q4 gross bookings grew by about 24% on a constant currency basis but by only about 13% expressed in U.S. dollars compared to prior year. International gross bookings grew by about 29% on a constant currency basis and by 16% expressed in U.S. dollars. When US dollar momentum eventually stabilizes, Priceline should be rewarded with strong financial results.

What makes the long term Priceline story interesting are the trends in emerging market, particularly India and China. While online travel should continue to grow at a modest pace in developed economies, emerging markets should see growth at a much faster rate than the rest of the world. Increasing rates of digital penetration in these markets coupled with rapidly increasing disposable incomes should create a ripe environment for increasing discretionary travel, much of it booked online.

Priceline is very favorably positioned in China through its partnership with CTrip (NASDAQ:CTRP) Priceline noted the addition of almost 30,000 properties in China in 2015, having entered 2015 with 6,500 properties and exited the year with 35,000 properties. The company noted a significant pick up in domestic tourism in China, with much of that being booked online.

At this point in time, disruptive threats to Priceline's business also appear to be relatively few. The good news for the OTA players is that the travel bookings market is a large one, worth somewhere north of $1.3T annually in total booking volume, which represents substantial opportunities to go around for additional entrants.

Recent hotel chain consolidation (such as that between Marriott and Starwood) doesn't appear to threaten Priceline as much as it does the more US centric players. The European hotel market is characterized by a much greater degree of fragmentation, and significantly greater number of properties with relatively limited inventory.

AirBnB is potentially a disruptive business model, not only to Priceline and other hotel inventory aggregators, but to the hotels themselves. AirBnB allows individual home and apartment owners to list their own inventory for users to book short term and medium term stays. However AirBnB also suffers limitations with respect to inventory location. Individual owners/investors are unlikely to have prime inventory locations which vacationers will prefer. Finally, there are the cultural aspects of just staying in someone else's house. While Westerners may be more open to such a practice, it will be interesting to see whether consumers in emerging markets, particularly in Asian economies, embrace such an experience.

Finally, while Google (NASDAQ:GOOGL) and other large tech players have made noises and taken initial steps to enter this market, there is still the absence of a concentrated entry strategy by any of these players to become a direct online travel agent. With so many moon shot projects underway, it appears Google lacks the intent and focus to really play a more meaningful role in this market. Its possible that this may change in the future, however for now the status quo seems likely to continue.

Priceline seems set for continued strong growth in 2016, in spite of recent terrorist activity in Brussels, which will likely be a slight setback to earnings without being a major disruptor. Continued falls in the PCLN stock represent a further opportunity to buy.

Disclosure: I am/we are long PCLN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.