- Priceline stock came under pressure in 2015 due to a strong dollar and the company's high international exposure.
- The stock, however, is beginning to recover in 2016 as investor sentiment around the company improved due to a weakening dollar.
- Priceline has maintained superior margins and better operational efficiency compared to Expedia making it a good long-term pick.
In 2015, the strong dollar made Priceline (NASDAQ:PCLN) stock fall out of favor with investors due to the company's high international exposure. 89% of Priceline’s revenue is tied to international markets compared with just 35% for Expedia (NASDAQ:EXPE). The U.S dollar gained more than 20% against a basket of the world’s leading currencies, and more than 50% against some South American currencies. The massive gains by the dollar decimated Priceline's growth in most of its international markets, something that is clearly evident in the company’s top line growth. Priceline recorded fourth quarter revenue and full-year revenue growth of 8.7% and 13.3% respectively, considerably slower than the previous years when the company’s revenue expanded by more than 20%. In contrast, Expedia’s dollar denominated sales allowed the company to post fourth quarter and 2015 revenue growth of 29% and 19% respectively.
Priceline’s slowing growth was clearly reflected on the performance of Priceline stock: Priceline stock finished the year 2015 with gains of 12%, badly underperforming Expedia stock which made gains of 46% over the same period.
But the tables have turned in 2016 with the dollar weakening against many international currencies. The dollar is down 3.6% compared to Japanese Yen which has gained 7.3%; the Euro is up 3.3% while the Chinese Yuan has gained 2.4%. The weakening dollar has led to improving sentiment for Priceline stock, which has gained 6% YTD compared to Expedia stock which is down almost 11% over the same period.
Priceline Stock vs. Expedia Stock YTD Returns
Source: CNN Money
A comparison between Priceline and Expedia reveals that Priceline has managed to maintain its lead in operational efficiency and profitability over Expedia despite these headwinds. Both companies are seeing robust demand as evidenced by the strong run in gross bookings at both companies. Priceline recorded bookings growth of 13% during the last quarter (24% on a constant currency basis) and said its targeting 12%-19% growth during the current quarter (18%-25% on a constant currency basis). Meanwhile, Expedia posted 40% gross bookings growth during the fourth quarter.
Priceline’s gross margins, however, remain much higher than Expedia’s courtesy of its operational efficiencies. Priceline’s gross margins have improved from 78% to 93% over the last three years while Expedia’s have grown from 78% to 84% over a similar timeframe. The improvement in gross margins by both companies is due to a gradual shift from a merchant business model to an agency model. Priceline’s favorable business mix is mainly to thank for its superior gross margins. Priceline relies much more heavily on the agency booking model than does Expedia, with 71% of its revenue coming through this channel compared to 28% for Expedia. The agency booking model has better margins than the merchant model because an OTA does not need to maintain inventory. This allows the company to forego related costs, leading to better margins.
Meanwhile, Priceline’s net profit margin of 27.7% is more than double Expedia’s reading of 11.5%. Priceline has Booking.com to thank for this. Booking.com, which accounts for more than 85% of Priceline’s revenue, is domiciled in the Netherlands where corporate tax rate of 25% is much lower than the U.S. tax rate of 38%.
Priceline's superior margins and better operational efficiency compared to its chief rival Expedia will keep investors interested in Priceline stock. Meanwhile, with the dollar gradually weakening against many world currencies, Priceline is likely to start seeing better growth in the coming quarters. This should help Priceline stock to continue making stronger gains going forward.