- Priceline has great growth, solid margins, and dominance – everything a value investor can ask for.
- Hotel consolidations and efforts by hotels to obtain direct booking traffic may pose serious hurdles to Priceline’s future.
- Although Priceline stock looks like an attractive value play, investors should proceed with caution.
Priceline (NASDAQ:PCLN) has established itself as the dominant Online Travel Agent (OTA) with Expedia (NASDAQ:EXPE) behind them. On paper, they meet most criteria of value investors, but there are still some questions about their future. As you can see below, Priceline beat most benchmarks over the last 5 years making investors very happy.
Source: Priceline's 10-K
Bad: Priceline May Like 'Buying/Acquiring' Too Much
Some of Priceline’s growth and dominance has been secured and funded by their capital expenditures. Their purchases include Kayak, Hotel Ninjas, OpenTable, Rocketmiles, Qlika, etc. With these acquisitions being no more than 2 or 3 years old, it isn’t easy to fully understand all of the synergistic effects of these companies and whether they are all viable investments. However, if we look at their capex in comparison to their total revenues, it only comes out to about 1.5-2%, which is not bad for a company that has a 3-year revenue growth of 20.6%. As the industry evolves and branches off into different niches, it appears Priceline is looking to keep up by way of buyouts, which can be effective but also disastrous. Priceline’s long-term debt grew to almost $6.2 billion for 2015, which is a 60% jump from the year-ago period. And for the years 2014 and 2013, the debt doubled YoY. Now while the debt is very manageable at the current stage, it is nonetheless growing faster than the company’s top or bottom line.
Good: Priceline Has an Incredible Bottom Line
Priceline is a cash cow. The company has an operating margin of 35.3%, which is head and shoulders above Expedia’s 6.2%. They produced nearly $3 billion in free cash flow for 2015, which represents nearly a third of their sales. Numbers like these excite investors and show that the company is operating very efficiently in a way that yields simultaneous increases in topline and bottomline. This screams value to an investor, especially when comparing it to its competitors and seeing how they are growing their net income by almost twice the industry average.
Bad: Future Competition Isn’t So Clear
As it stands, Priceline is by far the top dog in online travel agencies, and they don’t face much direct competition that threatens them. However, stronger competition can be on the horizon. The first part of competition comes from the changes and niches growing in the OTA market, such as Airbnb, which offers room letting by people who want to rent their property for money. Airbnb has been such a hit that it has commanded a value of $25 billion in the latest round of funding. The next area of competition comes from the hotels themselves. There has been a push by hotels to drive more booking traffic to their websites rather than through online travel agencies, and they have been having some success doing so. And a merger between Starwood Hotels & Resorts Worldwide and Marriott International worth $13.6 billion is a huge consolidation effort within the lodging industry, which can have a negative impact on Priceline. If the industry continues to consolidate it can reduce competition on lodging pricing, and give the hotel companies more negotiating power over the online travel agencies, or possibly try to stomp out their bookings and commissions altogether. This poses a real threat to Priceline’s future.
Good: They Continue To Grow
Being the established player in the area, Priceline has a huge leg up when it comes to expanding into and building out of newer markets. They can continue their dominance in the markets they are established in and capitalize on growing vacationing trends into newer or popular geographic regions; China, Cuba, etc. It’s difficult to say how much longer Priceline can post significant revenue growth before they plateau, but they are on track to hit about $11 billion for 2017. Combining that kind of growth with their margins would create solid value for investors.
At first glance, Priceline screams value. It has everything an investor wants – growth, dominance, incredible margins, piles of free cash flow, etc. But there is an uncertainty about the future of the company. Priceline definitely warrants an investment on paper, but the uncertain future can make investors a little hesitant. It’s hard to tell right now if hotel consolidation and efforts to eliminate Priceline as a middleman will have a major impact on the company, or if it will just be a hiccup in the road. Priceline stock may look like a good value play but investors should proceed with caution.