Priceline (NASDAQ:PCLN) has been among our top stock picks and has returned over 45% since our first coverage. The rule of investing is to buy low and sell high, and at 45% gains in less than 9 months, a question in the minds of the investors will be whether or not it is time to sell? The sell decision assumes greater importance considering that the stock has gained over 85% in the year-to-date (as on December 18). It would be prudent to take a fresh look at the fundamentals of the company and understand what to expect from the company over the coming quarters.
Sources of revenue growth
The company has seen phenomenal revenue growth over the last few quarters and it will be interesting to look at the international and domestic revenue growth rates in order to understand the drivers/sources of revenue growth for Priceline.
The chart below displays Priceline’s international and domestic revenue growth rate over the last 4 quarters.
Based on the company’s SEC filings
It is clearly evident that the international revenues are growing faster thus driving overall growth at the company. Another important fact is that the domestic revenues have also seen faster growth in 2013. We believe that the increasing growth rate of the domestic revenues is largely due to Priceline’s acquisition of kayak.com, the online travel Meta search portal. The company will continue to see further growth in domestic revenue due to its latest acquisition, which will also help the company improve advertising revenues across its online properties.
Priceline Revenue Components
Let’s now take a look at the revenue composition of Priceline.com. The company has constantly looked at expanding its geographical presence through some smart acquisitions. This has led to fast growth in international revenues which can be seen in the chart below. International revenue contributed 85.3% of the total revenues in Q3 2013, up from 82.65% a year ago.
Based on the company’s SEC filings
One of the drivers of Priceline’s international revenues has been Booking.com, acquired in 2005. The booking.com portal is an online brand primarily focussed in Europe and today commands a 50% market share of the European online hotel booking market (as of June 2013). The focus on international sources of growth has led to a faster growth in the international revenues as compared to the more saturated domestic in market in the US.
Priceline Economic outlook for Q4 2013 and FY 2014
A major source of international growth has been the company’s to become the market leader in Europe with its booking.com brand. It will be interesting to note that the European economy is finally seeing a turnaround as can be concluded from the latest numbers of the EU GDP growth rates. According to a report by The Economist the EU is set to see a turnaround with a marginal contraction in Gross domestic product (GDP) in 2013 before returning to growth in 2014.
The scenario of the US economy also seems to be improving. According to a report by the US Bureau of Economic Analysis the US economy registered a 3.6% growth in Q3 2013 following a 2.4% growth in Q2 2013 on a Q/Q basis. The improving economic climate in the US and Europe will hold positives for Priceline, the online travel giant.
To better understand the implications of the improved economic conditions for the company and the online hotel booking industry in general, it will be worthwhile to look at a report from the World Trade and Tourism Council (WTTC). The report suggests that business travel and GDP growth are positively correlated and therefore a positive economic outlook for 2014 will mean a better business environment for the online travel industry as a whole.
While the entire online travel industry will benefit from the improved business conditions, Priceline will be the biggest beneficiary of an EU turnaround as its booking.com is the market leader in the region. In case of the US market, the company has seen faster growth in revenues following its acquisition of kayak.com, which was completed in Q1 2013. Expedia’s (NASDAQ:EXPE) market share in the US will be under threat as a result of the kayak.com acquisition by Priceline. As a result of the company’s strong fundamentals and the tailwinds in 2014, we continue to hold a positive long term outlook on Priceline.
To see Priceline’s latest stock price movement, click here (NASDAQ:PCLN)