- Priceline is still growing on a currency neutral basis despite dealing with a strong dollar.
- Although China isn't adding much to the top line at present, it is the fastest growing market in this sector at present.
- Airbnb might not continue to grow at these levels. Priceline has the financials and listings to protect its market share.
There may be opportunity brewing in Priceline (NASDAQ:PCLN) at the moment, especially when you see the beating this stock has taken over the last 5 weeks. Priceline stock is down over 10% in price over the last month or so (see chart), primarily due to the company's lower guidance for the fourth quarter, and also the Paris bombings to a lesser extent.
This company has grown its revenues exceptionally fast. Turnover is expected to top $9 billion this year which will be three times the sales figure printed in 2010. Priceline stock dropped by 9% when the company reported its lowered guidance for Q4 in early November even though the company still expects revenue to rise to an average of around $1.93 billion (compared to $1.83 billion in the fourth quarter of 2014). Margins are slipping however with the company projecting an EPS of $11.50 compared to $12.38 from the street. In saying this, I still believe this company has plenty of upside despite the huge run-up it has had since 2009. The stock is actually consolidating (up only 11% since January 2014) which means its lower growth rates are slowly being priced into the stock. Furthermore, the US dollar could have topped out which I discussed in a previous article here and if it has, it will be a huge tailwind for Priceline as it derives most of its sales from international markets.
Firstly the penetration of the travel booking market (now valued at $1.2 trillion) is still relatively low at 39% which means there is ample room for growth for Priceline, especially in China. Many analysts see potential risks regarding competitors entering this space in the future but we still haven't seen a focused entry from any tech company such as Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet Inc-C (NASDAQ:GOOG) as strong tech companies seem to be the only viable threat to Priceline going forward, due to their financials and user base. Furthermore, and as long the status-quo remains, one would feel that Priceline will continue to gain market share over time. The company announced last month that it now has 820,000 properties on its network which is almost three times bigger than its nearest competitor - Expedia (NASDAQ:EXPE). These properties amount to over 21 million rooms that could be booked at any given time. If we assume a 65% occupancy rate, you are still only at 3% of global bookings which is very small. This is why I see growth rates improving once dollar weakness comes into the equation. On a neutral currency basis, bookings increased by 25% compared to the same quarter of 12 months prior. When you include dollar strength, the figure drops to 8.3%. I see this figure easily getting back to the high teens once the dollar reverts to its mean which should happen over the next 12 to 18 months.
Secondly, and continuing the growth potential theme, China offers huge potential as its the fastest growing market in the world and will undoubtedly become the largest soon if it is not already. Priceline has a strong presence in China through its partnership with Ctrip (NASDAQ:CTRP). Also, Priceline's recent investment in the company back in May seems to have been a timely move as Ctrip's profits have surged meaningfully since the second quarter of 2015. Ctrip's third quarter results where net profits jumped to over $401 million (a 600% increase on a rolling year basis) illustrates that this company after many loss making quarters, has some serious momentum behind it now. This has to benefit Priceline which by my calculations owns around 14% of the company. However Priceline isn't solely relying on its Ctrip's stake in China. It's crown jewel "Booking.com" has added almost 20,000 Chinese properties to its listings this year alone. Furthermore the company continues to spend heavily on advertising on websites such as Baidu (NASDAQ:BIDU) and Qunar (NASDAQ:QUNR), and I just think its European dominance over other Chinese competitors should ensure that it continues to gain market share over time. The fast growing chinese middle class are fueling the huge competition in this sector, so expect more heavy investment from Priceline in China going forward.
Finally I don't see the emergence of Airbnb to be a huge threat to Priceline. Airbnb announced recently that it has over 2 million listings in over 190 countries which probably prompted Priceline to come out and report its very own numbers which were 20 million+ listings. Airbnb is growing rapidly and has just secured more funding but because of the huge disparity between the listings (Many of Airbnb listings are rooms in other people's houses), I don't see Airbnb as a strong long term threat. Why? Well, firstly Priceline has more than enough (over 6 million of vacation rental and alternative ) accommodation on its books to compete with Airbnb in this area. Secondly Airbnb is still too small ( Had 7 times less bookings than Priceline and Expedia last quarter) to compete against the big two. Many hotel owners are already complaining about the "cash" element of hosts availing of this service and the security element. Multiple "incidents" could definitely harm Airbnb's brand going forward as scale at the moment is preferred to vetting people who upload listings.
To sum up, Priceline is an enviable position of being the leading OTA in a sector that is definitely growing. Barriers to entry are very high in this sector (solid cash flows and huge man-hours needed to get hotel information) and when you see the growth happening in South America and China, its obvious that the companies with more online presence should get the business. The stock has been hit hardly as a result of poor forward looking guidance. Furthermore its forward price to earnings ratio is 18.7 which should turn up once the dollar starts to weaken from these levels.