I initiated a position in Priceline (NASDAQ:PCLN) for my Project $1M portfolio earlier in the year, when the stock was trading at $1,110. The stock has advanced some 11% since I added it (with the position up almost 22% prior to Brexit!). In light of the events around the UK's withdrawal from the EU and Priceline's dramatic 11% plunge, I wanted to consider if Brexit changes Priceline's broader story.
My initial thesis for Priceline was built around the fact that its natural barriers to entry will 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. It is a name and destination that is synonymous with travel booking. That makes it top of mind for consumers looking to book travel.
Priceline was hit particularly hard by investors as a result of Brexit (the withdrawal of the UK from the European Union), dropping almost 12% post the announcement. In fact the stock may continue to drop further on the days ahead if the market rout continues. It appears that the reason that Priceline got hit particularly hard is a result of its European via Booking.com.
Priceline gets north of 50% of bookings, and a similar amount of revenue from Europe. With Britain's exit from the EU, and the corresponding hammering of the British pound, there are near term questions as to how this may impact British travelers looking to travel within Europe and even globally.
All of a sudden, the cost of an overseas holiday and hotel stay has become significantly more expensive for these travelers. Bookings from the UK account for about 15% of Priceline's overall revenue. While there will arguably be some level of impact from a decline in travel originated in the UK, I believe the market has overacted.
Priceline's market cap declined almost $8B Friday. Put into context, that's factoring in an almost $500M earnings impact (given a PE of 16), effectively a permanent, material diminution from UK earnings to Priceline, from a modest exchange rate decline. That seems a totally irrational market response, unless this event really does herald the start of a long-term decline in European purchasing power and an overall reduction in the willingness of Europeans to travel.
The market response also ignores the medium to longer term trends in the travel sector. What makes the long-term Priceline story interesting are the trends in emerging market, particularly in 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 a variety of lifestyle experiences, such as increasing discretionary travel. Much of this travel will be booked online.
The coming decade will see an emerging middle class of over 600M in India and China combined, many of whom will be looking to travel both domestically and abroad. Priceline is very favorably positioned in China through its 15% equity investment and commercial 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.
CTRP has also made its own investment in makemytrip (NASDAQ:MMYT), one of the leading Indian travel aggregators. Priceline is also addressing the growing latin american market with its partnership with Hotel Urbano.
While Priceline may suffer some near term pain as a result of its outsized exposure to European markets, investors would be wise not to neglect the more interesting medium term trends in travel, and Priceline's favorable assets and positioning in these markets. The emerging markets story will drive Priceline's growth for the next decade.
More substantial declines in Priceline stock will likely get me interested in topping up my holdings and increase my long-term exposure to this great business.
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.