Recent Events That Could Slow Priceline's Growth

  • A Google, Facebook or Amazon has the potential to take away serious market share from Priceline. Nevertheless it would need to be a focused effort and it would take time.
  • If the "Rate Parity" clauses get abolished, Priceline would definitely get hurt as they wouldn't be protected.
  • A recession could hurt Priceline's stock because I feel its value is connected with consumer spending. People will not travel as much if we have a economic contraction which would hurt Priceline's margins.

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Investors who have had Priceline (NASDAQ:PCLN) in their portfolios this year must be pleased, as the stock has had an excellent 2015 thus far with Priceline's stock up 12%+, compared to the poor performance of the S&P500 which is down 4%+ (see chart).

PCLN stock chart

Priceline stock price vs S&P 500 by amigobulls.com

Furthermore after the company's bumper earnings in the second quarter of this year where the company grew revenues to $2.28 billion, it is becoming evident that this company is not going to slow down any time soon. Analysts that may have pointed to the summer season as the reason for Priceline's robust earnings were quickly informed that Q3 earnings for this year are predicted to be even bigger. Furthermore, given the run up Priceline's stock has had in the last ten years (6000% gain in 10 years), one could have been excused for thinking that when a correction came, Priceline would have fallen more than the general index. Well at the back end of last month when the S&P fell pretty sharply, Priceline passed another test, as it fell much less than the general index. This company is in a huge growth market and through its relentless acquisition rate, there isn't very much standing in the way of its dominance. However a few things could definitely slow this company's growth trajectory. Let's go through them one by one.

Priceline's Latest Acquisitions

Firstly there seems nothing at present that can stop the duopoly of Priceline & Expedia (NASDAQ:EXPE) in the online travel sector. Beside these two mammoths, you have many smaller players, but many of these might actually want to get acquired, because they know they never will have the firepower to compete against the big 2.

Priceline is also quickly gaining market share internationally in the restaurant reservation space (last week it acquired AS-Digital), where its prime competitor is Tripadvisor (NASDAQ:TRIP). TripAdvisor definitely has a leg up internationally, but not in North America. In the US & Canada, Priceline's opentable.com has helped it become the undisputed leader in North America and its new Australian acquisition will be integrated into opentable.com in the near term.

Acquisitions come thick and fast in this space and for very good reason.  The online travel industry will continue to grow for many years to come. So anytime a worthwhile contender comes onto the scene for acquisition, Priceline usually pounces at the opportunity because it wants the future traffic. Moreover this industry is noted for its huge advertising spend. Priceline for example increased its advertising spend in 2014 by almost 35% to almost $2.6 billion. This was 30% of revenue (as the chart below confirms) and the chart also confirms the excellent operating margins this company presently enjoys.

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So what could slow down Priceline's really impressive operating margins? Well, other internet companies like Facebook, Google or Amazon could really pose a threat here if they decided to really come into this space with a focused effort. The two things these companies have are customer traffic and budgets, which mean they could definitely take away market share from Priceline.

Take Amazon for example, which has already launched "Amazon Destinations", a company that could easily scale a travel offering at profit margins that are far lower than those Priceline is currently achieving. Google also seems to be dipping its feet into this market with its own launch of "Flight-Search" which is a meta search website for flight comparisons. If any of these companies decide to scale, they definitely have the budget and the user base to compete. Having to advertise more would definitely affect Priceline in a negative way. However the market seems to be still some time away from having more major players competing because even the likes of Google and Amazon would still need considerable time to build up their networks and deal offerings.

Potential Changes In The Rate Parity Clause

Secondly the "rate parity" clause in this sector has definitely benefited large online travel agencies for many years but things may be about to change especially in Europe. These clauses or agreements state that a respective hotel cannot sell a room at a different price to Priceline or any other OTA for that matter. This clause protects the OTA companies because they have a built in margin into the prices at which they sell on their websites, or prevent them from undercutting aggressively. However some European countries are trying to loosen this clause and are having some success.

Booking.com (Priceline's jewel) has already changed its standard agreements and I believe further concessions will follow. There is definitely an element of "price fixing" in these clauses and some hotels definitely would prefer a freer market. Can I see "rate parity" clauses being abolished in the near term? Probably not, as hotels may say they want to be able to negotiate with customers but the bottom line is what counts. What OTA's give respective hotels is coverage and reach. Hotels selling rooms on their own website is one thing, selling enough of them is another. One thing is definitely certain. If these clauses get abolished and the public become fully informed about the new ways (by contacting the hotel directly) a room can be booked, OTA's will definitely be damaged and will most certainly have to drop their margins. If Europe succeeds in eradicating these clauses, it may cross the pond and that is the market that would really hurt Priceline.

Recent Macro-Economic Woes Pose A Near Term Threat

Finally what definitely would affect Priceline would be a US recession. Take a look at the chart below which shows US daily consumer spending from 2008 to 2015. I just feel that Priceline's stock is tied closely to consumer spending because people will not tend to travel when there is a contraction of money in the economy. As you can see from the chart, consumer spending almost halved in the crash of 2008 and it still has not recovered to pre-2008 levels illustrating that this is one of the slowest recoveries in US history. What are some scenarios that could cause a recession in the US?

  1. Continued strength in the US dollar - In this scenario, American multinationals will continue to post poor earnings due to currency headwinds. The stronger the dollar gets, the more foreign goods get imported in which will take market share from domestic goods. This will then result in stock markets going lower in the US which will reduce pensions and retirement accounts and as a result, consumer spending.
  2. Higher interest rates would in my opinion compound the problem because it would strengthen the dollar even more, especially as China & Europe are undergoing massive easing programs at present.

 

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Recent Events That Could Slow Priceline's Growth - Conclusion

Out of the 3 ways Priceline could potentially slowdown, I think a recession would be the most likely. The US throughout its history has a recession every 4 to 6 years, meaning that we are probably due for one any time soon. Bulls may argue with me here and state that travelers will still travel even if they decide to book cheaper hotels to do so. This may be true but lower price bookings invariably mean lower commissions for Priceline which would definitely put a dent on its operating margins going forward. Furthermore investors should remember that this stock rallied hard in the past as a result of large share buybacks by management. These "buybacks" would definitely slow down if net income levels dropped as a result of a recession.

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