- Priceline might have overpaid for OpenTable, as potential synergies don’t scale that effectively and economically.
- However, OpenTable gives Priceline customers the ability to plan a trip including their restaurant bookings. This gives Priceline a competitive advantage, and a larger moat.
- The recent pullback should be seen as an opportunity to accumulate a position in the stock.
Priceline (NASDAQ:PCLN) announced the acquisition of OpenTable (NASDAQ:OPEN) on June 13th 2014. The deal is valued at $2.6 billion and is expected to close in the 3rd quarter of 2014. Surprisingly, the OpenTable acquisition offers a lot of synergy for Priceline. However, it came at a significant price and it’s unclear whether or not Priceline will be able to turn this into an accretive acquisition over the short-term.
Potential Synergies From Priceline-Opentable Deal
Currently, Priceline is perhaps the best way to identify the lowest price provider of travel, and lodging. However, upon the acquisition of OpenTable, Priceline can also identify either the lowest priced restaurant, or the highest rated restaurant. Therefore the combined synergies are through giving consumers the ability to plan an entire trip from a single website.
However, investors have literally thumbs downed the business deal. Priceline stock declined 3% following the announcement of the deal. Admittedly, Priceline may have paid a little too much, but the core business is soundly intact. Therefore, the recent pullback might make for an opportunity to accumulate a position in Priceline. The negative sentiment is likely to be temporary.
|Market Cap (in billions of $)||62.36||2.46||5.37|
|Quarterly Revenue Growth (YoY)||0.26||0.18||0.66|
|Gross Margin (TTM)||0.86||0.74||0.93|
|Operating Margin (TTM)||0.36||0.23||-0.03|
|Net Income (TTM)||1.98B||22.60M||-7.90M|
|P/E ratio (TTM)||31.74||111.27||NA|
|PEG ratio (5 yr expected)||1.15||3.91||-29.04|
|P/S ratio (TTM)||9.01||8.35||17.92|
Source: Yahoo! Finance
It is clear that OpenTable has a smaller market capitalization relative to Priceline. However, the two companies trade at very different valuations, as Open Table was bought out at 111 times its trailing twelve months (TTM) earnings. While the two companies do demonstrate similar profitability metrics, the only problem is that the incremental revenue increase for Priceline is relatively small. Therefore, Priceline will have to generate significant sales growth to make the $2.6 billion acquisition worthwhile.
Looking over the historical data, OpenTable’s customer base is smaller in size to Priceline’s. To be more specific, in the first quarter OpenTable seated 46.7 million people. In comparison, hotel room night stays were 83.4 million in the first quarter of 2014 for Priceline. However, there is significant growth potential considering the fact that people tend to dine-out more than they travel or stay at hotels.
Priceline booked 83.4 million hotel nights, and 12.3 million rental car days in its most recent quarter. Obviously discount airfare, hotel room stays, and rental cars have way higher average selling prices, making the business model more scalable when compared to restaurant booking.
Valuing Priceline-Opentable Deal
Assuming the figure for hotel night stays is accurate; Priceline can add 83.4 million people to OpenTable’s seated diners figure in a single quarter. After all, people who stay in hotels also dine out. However, not everyone has to reserve a table when they dine out. I mean restaurants do thrive on walk-in business. And furthermore, OpenTable only becomes relevant when it comes to reserving a table at a higher-end restaurant, or ensuring you have a table during pay-per-view events at a bar. Also, some of Priceline’s customers may already be OpenTable users, so the incremental user growth may not be as great.
That being the case, let’s assume Priceline can convert the 83.4 million people that books hotel rooms into OpenTable users. OpenTable earns $1.15 per seated diner. Therefore, if OpenTable were able to convert 83.4 million additional people into a seated diner, the incremental revenue growth would be $95.91 million, multiply that by 4 quarters, and you’re looking at $383 million in added revenue annually. Add the $200 million in revenue that OpenTable currently generates, and the revenue may grow to $583 million.
That incremental growth makes it hard to justify the $2.6 billion that Priceline paid for the company.
Priceline Stock Is A Buy
Admittedly, the synergies are there, but Priceline might have overpaid. Even with incremental revenue growth assuming the absolute best case scenario, Opentable’s growth is unlikely to move the needle on Priceline’s bottom line.
However on the brighter side, Priceline’s core business is soundly intact (high growth, reasonable valuation, high margins and cash flow rich). Investors should see the recent pullback as an opportunity to accumulate a position in the company.
Amigobulls has been bullish on the Priceline stock for awhile now. See the complete Priceline stock analysis here.