Premium Valuation Is Not Justified By A Strong Business Model

| About: The Priceline (PCLN)

Shares of (NASDAQ:PCLN) trade 4% lower in after hours trading after the online travel booking company reported its first quarter results.

First Quarter Results reported a 28% increase in first quarter revenues to $1.0 billion. Gross profits increased 47% to $743 million, with operating income increasing 57% to $242 million. GAAP net income came in at $182 million, or $3.54 per share. Analysts expected the company to report $1.04 billion in revenue.

CEO Boyd commented on the figures. "The Priceline Group's hotel business booked 46 million room nights in the quarter. International gross bookings increased 54% driven by strong results at and The Group continues its investment in building content for our customers and attractive new offerings to support future growth."

Growth at the company's international division increased 54% on the year. Gross bookings came in at $5.4 billion, despite some weakness in certain parts of Europe. Domestic gross bookings increased 12% to $1.3 billion. The company reported a 47% increase in hotel room bookings to 46 million nights, a 41% growth in rental cars to 7 million days and a 5% increase in air ticket bookings to 1.5 million.


For the second quarter Priceline expects a 26-31% increase in total gross bookings, driven by a 32-37% growth for the international division, as domestic growth will slow down to 5-10%. Revenues are expected to increase between 18 and 23% with GAAP net income coming in at $6.34-$6.54. The earnings guidance was in line with analysts expectations while the revenue outlook fell short of expectations of 26% growth.

Valuation ended its first quarter with $3.6 billion in cash, equivalents and short term investments. The company has roughly $1.4 billion in convertible debt outstanding. Technically the company has a net cash position of $2.0 billion, which could increase as debt holders will convert their debt into shares, which would automatically dilute current sharholders holdings.

Factoring in a modest decline in after hours trading shares are valued at roughly $35 billion. This values the operating assets at around $33 billion or 7.6 times annual revenues and 31 times 2011's annual earnings. This valuation compares to a revenue multiple of 8.7 times for Tripadvisor (NASDAQ:TRIP) and 1.5 times for Expedia (NASDAQ:EXPE). These competitors trade at 30 and 17 times earnings, respectively.

Currently the company does not pay a dividend.

Investment Thesis is one of those shares like Fossil (NASDAQ:FOSL), Chipotle Mexican Grill (NYSE:CMG), Herbalife (NYSE:HLF) and Green Mountain Coffee Roasters (NASDAQ:GMCR) among others, which have seen their shares multi-fold over the last couple of years. A recent correction in some of these "high fliers" and massive short stock interest have sparked the debate about these companies' valuations.

Shares in rose from levels of $70 in the beginning of 2009 to a peak of $775 in April this year. After today's modest correction, shares have fallen slightly below the $700 level. Shares trade at a premium valuation of 30 times 2011's earnings while revenue growth in the US is slowing down and margins which peaked at 24% in 2011 fell to 18% in the first quarter of 2012.

With the possibility of new entrants in the online travel market and execution risks on the rise, as the company heavily depends on Google search algorithms, I might consider a short position in the shares.

Disclosure: I am short CMG.

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