- Priceline beat estimates due to its exposure to international bookings and transition to travel stays.
- The company’s efforts to grow adjacent platforms like OpenTable and Bookings.com are promising.
- Priceline stock seems extremely undervalued, and I anticipate investors to pile back into momentum names like PCLN.
At this point, investors are looking for any reason to get back into Priceline (NASDAQ:PCLN) despite hyped generalizations over room night stays shifting in the OTA (online travel agency) space from hotels to homes. And while those observations are true, Priceline has shifted its focus to be more inclusive of alternative products like homes and apartments, which require upfront deposits and customized listing features, which are inclusive of reviews.
Given its pre-established base of mobile/desktop users, Priceline’s efforts to widen its travel offerings both domestically and internationally yielded results which investors were able to rally around. Towards the end of FY 2015, I was concerned by the competitive risk factors. However, these have been addressed in the most recent quarterly earnings conference call due in part to better than expected impact of seasonality on room stays in conjunction with improvements to take-rates thus translating to better gross margins.
Priceline reported revenue of $2 billion and EPS of $12.63 for Q4 2015, which beat analyst consensus estimates by 1.93% and 6.66% respectively. Analysts were a little conservative going into the quarter, which allowed management to have enough flexibility on its P&L, as gross profit improved by a couple hundred basis points YoY. Priceline remains committed to R&D, SG&A but has shifted its focus towards international markets whereby efforts to reconfigure the bookings app to be more inclusive of language, search and location specific features have been made.
Quoted from Priceline earnings conference call:
Every year is an investment year at The Priceline Group. Well, every year is also an opportunity to deliver outstanding bottom line results. We evaluate every opportunity with a long-term lens, requiring that it deliver value for our brand franchises tomorrow beyond just delivering transactions today. 2016 will be no different as we invest in exciting new opportunities like OpenTable's international expansion or BookingSuite cloud software offers, or Booking.com for Business while maintaining superior operating margins that will allow us to win in the face of heated competition.
Commentary on margins wasn’t as reassuring going into the next-year, but efforts to invest into OpenTable sound promising due to the synergies of combining its OTA capabilities with restaurant bookings for foreign travelers. As such, I would view Priceline’s ability to grow despite its market penetration into travel rather remarkable. Efforts to further expand into China via Ctrip has boosted the organic growth rate for properties, which increased from 6,500 in China and India to 35,000. The inventory improvements translate to heightened growth prospects from the Asian region, which is under-penetrated and shows compelling growth prospects for international/domestic travel despite currency headwinds.
I’m anticipating revenue to show more sequential strength due to a drop-off in F/X volatility and while the Fed is broadly anticipated to increase interest rates over the course of 2016, the impact on the currency markets will be less severe when compared to 2015. As such, investors should also anticipate upside in from of F/X despite the mix-shift to foreign markets.
Priceline has made further efforts to penetrate into business bookings, which are known to have shorter duration stays, which diminishes the company’s efforts to offer compelling travel discounts. After all, business travels tend to be 1 to 2 night stays, which reduces the wholesale component of Priceline's business, which implies that Priceline's strategy needs to focus less on discounting and more on travel-specific features for business oriented customers. That being the case, Priceline mentioned that business-bookings are growing at a quicker pace than leisure and that it represents 20% of the potential sales mix. The market for OTAs with regards to business bookings has yet to open up, but technological features that allow managers to track budgets or keep tabs on expense accounts are starting to show promising results.
Key commentary from sell side analysts:
Thematically in-line with last quarter's disclosure, we believe the most important item from this earnings report was the disclosure that PCLN now has 22.6mm bookable rooms on the platform, which at 65% occupancy still only suggests that it has ~8% share – this continues to suggest to us that Priceline remains an open-ended growth story with a long runway for growth. More near-term, consumer travel demand remains resilient in general - room nights growth for 4Q15 was 27% YOY and compounded with continued positive mix of Agency, both FX neutral bookings and gross profit dollars were above expectations. Maintains outperform, and price target of $1,600. – Credit Suisse, Stephen Ju
We were positive on: a) better than expected Q4 top- & bottom-line results despite impacts from Paris (room night growth declined ~10 points for a 2-3 week period during the weeks following the events there, but bounced back strongly in December and into Q1); b) strong Q1 bookings growth guidance (+18%-25% YoY ex F/X), reflecting healthy travel macro & early positive reads on Q1 (Chinese New Year, early Carnival, Easter, etc.); c) re-acceleration in room nights growth (+27% YoY vs. 22% YoY in Q3 & our est of 20%); & d) new share repurchase program of $3bn. Maintains outperform and raised price target from $1,490 to $1,525. – UBS, Eric Sheridan
For the most part, I’m starting to become a bigger fan of Priceline stock. Sure, there are risks to owning the business, but most of those issues are tertiary and pertain to secondary points on foreign tax interpretation or competitive risks. Priceline will likely sustain mid-teen EPS growth due to its exposure to international markets and efforts to reignite growth domestically through business room night stays as opposed to leisure. The hotel market is still untapped and efforts to bring onboard more hotel chains should show promising results.
I’m raising my recommendation from sell to high conviction buy. I feel many of the concerns pertaining to competing OTAs have passed over and investors are looking to get back into this battered travel name. The stock has momentum beyond $1,300 given the predictable nature of growth and stabilizing market sentiment. I’m initiating a price target of $1,750 (25.21x EPS) for Priceline stock, which implies a 39.39% upside from current levels.