Priceline.com Inc.’s (NASDAQ: PCLN) stock price has been a talking point on Wall Street for close to a year now. The stock hasn’t disappointed the bulls, registering gains of over 70% in the year to date. That translates to absolute gains of $446 from the closing price on Dec 31, 2012 to its closing price on Oct 2, 2013. The stock which has been among our top picks for over three months now has gained over 6% or $50 in the last 3 days.
The most obvious question is whether it is time to book some profits? While there might be an opportunity for short term profit booking, what we are interested in is the long term potential of this ‘promising’ stock.
Looking at the fundamentals, the company has had a phenomenal run irrespective of the lens you analyze it through. If growth is what you value, Priceline has been leading that metric in the online travel industry. If earnings are what you value, Priceline is one company which will top your charts. It isn't without reason that the company’s stock has become the first technology stock to hit $1000 mark at a Price to Earnings (P/E) multiple which we call ‘acceptable.’ The chart below summarizes the current valuation of Priceline vis-à-vis its nearest competitors by revenues.
One look at the above chart shows that there are only two companies, Tripadvisor and Ctrip.com International, comparable to Priceline when you consider growth as well as profitability as important metrics in your valuation.
Priceline Growth comparison
Priceline is the fastest growing company among the top 5 online travel industry companies. In terms of revenue growth, the company comes in marginally ahead of Ctrip.com international’s (NASDAQ: CTRP) 30% average growth rate over last three years. However these numbers of Priceline begin to look extraordinary when you consider the fact that Priceline’s revenues are more than 7 times the revenues managed by Ctrip.com. Expedia (NASDAQ: EXPE), Priceline’s nearest competitor by revenues, has managed to grow its revenues at half the rate of what Priceline has grown at.
Priceline has higher profit margins than every other competitor in the industry, with the exception of Tripadvisor (NASDAQ: TRIP), which has marginally higher margins than those of Priceline. However the marginally higher margins of Tripadvisor have come at the cost to its topline growth. Tripadvisor has revenue growth of just over 19% which pales in comparison to Priceline when we consider that Tripadvisor’s revenues are less than 15% of Priceline’s revenues.
Priceline Earnings comparison
We have seen the fast paced topline growth Priceline has registered at significantly high profit margins. The valuation process only gets simpler once we have these two facts. A fast growing topline combined with high profit margins leads to higher earnings, which grow rapidly. This is exactly what is reflected in the column 4 of the table above. Priceline’s earnings growth is clearly head and shoulders above the rest of its competitors.
One look at the last twelve month (LTM) P/E multiples of the companies above, and it becomes clear why Priceline is significantly undervalued vis-à-vis its competitors. The average LTM P/E, based on yesterday’s closing prices, was just over 52 for the online travel industry. Priceline suddenly appears to be ‘very’ cheap even after the latest rally the stock has seen over the last three days.
We at Amigobulls continue to believe that the stock has significant potential in the long term even though the stock price has gained close to 10% in the month of September. Priceline stock price closed the last trading session (Oct 2) at a price of $1067.38, a gain of 2.8% over its previous close.
To see Priceline’s latest stock price movement, click here (NASDAQ: PCLN)
Disclaimer: We do not hold any stake in the aforesaid stocks. For detailed disclaimer, please click here.