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A Short Story About Priceline - Time To Sell

|Includes: Booking Holdings Inc. (BKNG), GOOG

Priceline is the class of the online travel industry.  It bests the others in nearly all measurable criteria, the most important of which is execution by its management team.  Long term execution is among the primary reasons why a company the size of Priceline can achieve a multiple of 45x its trailing twelve month's earnings 

Now is a great time to sell Priceline short.  Investors with an appetite for risk can short  anywhere in today's trading range ($460 - $469) and book a double digit return at some point over the next 6 - 9 months.  In spite of all the positive things I see in the Priceline story, the reality is that it cannot sustain the level of growth that investors are pricing into its shares.  Many have made that argument before and they turned out to be wrong.  This time will be different.

There are two big reasons why this time will be different - worldwide economic impact of the unrest in the Middle East and Google's impending entrance to the online travel business.

The revolution taking place in the Middle East will have a far reaching impact on consumers of travel all over the world.  Its a double whammy, as the growing unrest pushes oil prices ever higher, businesses of all kinds will have to raise their prices to make up the difference.  There is no greater direct impact than will be seen among airlines and other transportation providers.  They will raise their prices and this will cause the cost of travel to move higher.  The higher cost of travel will (at the margin) cause some consumers to choose to stay home rather than invest in a higher cost plane ticket or buy a few $4 per gallon tankloads of gas to drive to a resort destination. 

Further exacerbating this trend is the impact of higher oil costs to consumers, who will be dipping deeper into their budgets to pay for the cost of their non discretionary gasoline purchases and the increased costs of all the other goods that will move higher as the companies who provide them scale prices higher to cover the increased transport costs.  Thus, that same consumer who is trying to decide whether to book travel when the cost to get there has just moved higher will also be contending with a smaller budget due to his own increased costs.  This double whammy will certainly result in less spending on leisure travel which means Priceline will spend the next four quarters trying to beat the extraordinary results they have achieved the last 12 months with a strong headwind. 

To complicate matters, Priceline's greatest customer acquisition channel (Google Search) is moving rapidly into the online travel business.  Do not believe for a second that Google will not use the assets gained in its acquisition of ITA software to further monetize searches related to airfare, hotel rooms and car rentals.  Priceline has long been the champion (In the US and abroad) at leveraging its name marketing prowess to achieve pay per click arbitrage conversions that are the envy of the online travel space.  On an even playing field, Priceline has mastered that skill set to outpace its competition at an ever increasing pace.  When Google gets done making all of its promises and concessions to the DOJ, it will slowly implement new bells and whistles that will "improve the user experience for consumers" in the area of travel search.  What Priceline shareholders need to understand about that improved user experience is that it will connect searchers directly with travel suppliers, cutting out the middlemen except for the "very small" fees that Google will charge for the transaction. 

Priceline is a great company and their management team's execution the last few years would make a great textbook study of near perfection.  Their stock price reflects it.  Best of class management is what will allow Priceline to survive the issues described above and likely even maintain its status as the premier company in the online travel space.  However, the question for investors is not whether they will be able to survive or maintain their lead, the question is whether Priceline will continue to grow revenues and earnings at a rate that justifies a stock price of 45x its trailing twelve month's earnings.   Call me ShortSighted, but I do not believe that Priceline will be able to sustain such a rate of growth and I think that investors brave enough to establish a short position right now should easily book a double digit return over the next 6 - 9 months.