- Expedia has continued to outperform Priceline in most growth metrics as a strong dollar continues to wreak havoc with Priceline's growth due to its huge international exposure.
- The dollar is not likely to weaken any time soon.
- Should Priceline investors simply sell Priceline shares and buy Expedia shares?
Priceline (NASDAQ:PCLN) has had a rough year in 2015 as the extremely strong dollar continues to decimate its growth. Priceline shares have lost 10% over the past 5 days after the company delivered healthy Q3 earnings but said gross bookings were weak. Priceline delivered Q3 Revenue of $3.1 billion, good for 9.2% Y/Y growth, beating estimates by $50 million. Meanwhile Q3 EPS of $25.35 beat estimates by $1.12. While those results were quite decent, it was Priceline's gross bookings that undid any good: Priceline gross bookings rose just 7% Y/Y to $14.8 billion in Q3, but would have grown 22% excluding for-ex impact. Priceline said that gross bookings are expected to rise 1%-8% in Q4, but a more decent 13%-20% excluding currency impact. Compare that to Expedia's earnings numbers: Expedia (NASDAQ:EXPE), which is much less dependent on international sales (and thus less hurt by a strong dollar) than Priceline, saw bookings (exc. eLong) rise 21% Y/Y to $15.4 billion in Q3. Excluding forex, growth was 26%.
Expedia outperformed Priceline in nearly all key growth metrics as shown below:
|Revenue Growth(Y/Y)||Bookings Growth(Y/Y)||EBITDA Growth(Y/Y)||Air Tickets Growth(Y/Y)||Room Nights Growth(Y/Y)|
And this clearly reflects on the share performance of either company, with Expedia shares up 48.8% YTD vs. 15.6% YTD for Priceline.
Huge International Exposure Wreaking Havoc On Priceline’s Growth
For a long time Expedia has usually played second fiddle to Priceline in the growth arena, and especially when it comes to profitability, thanks to Priceline’s huge international exposure. About 88% of Priceline’s revenue comes from overseas markets, mainly via Booking.com which is based in the Netherlands. The company enjoys much lower tax rates in the country, one of the reasons for its superior profitability than Expedia. Priceline also boasts leaner and more efficient operations than Expedia. Expedia’s international exposure is limited to about 43% of its revenue.
One of Expedia’s biggest problems is its high marketing expenses, mainly orchestrated by running so many subsidiaries. Expedia is an extremely acquisitive company, and hardly a quarter or two goes without the company announcing an acquisition. Unlike tech companies that usually integrate new acquisitions into the main company as much as possible, OTAs tend to leave the subsidiaries to run quite independently of the parent company. This modus operandi can, unfortunately, lead to a bloated marketing budget. Expedia spends about 56% of revenue on marketing expenses compared to only about 34% by Priceline.
Even with its current growth woes, Priceline’s profit metrics stand head and shoulders above Expedia’s: Gross margin of 95% vs. 83% for Expedia; net profit margin of 38.6% vs. 14.6% for Expedia.
But profitability is only part of the story. Expedia has recently been able to improve its profitability considerably by divesting loss-making units such as eLong. As a result, Expedia’s return on equity, or ROE, has managed to surpass Priceline’s, at 42.6% vs. 29% for Priceline. Thus holding Expedia’s shares at the moment could yield better bang for buck than holding Priceline shares.
Given the prevailing macroeconomic factors, the strong dollar is not likely to weaken any time soon. The dollar has appreciated more than 20% against the world's leading currencies in 2015, and could continue doing so in 2016. With this kind of backdrop, Priceline's growth woes are not about to go away. Meanwhile Expedia’s much lower international exposure continues to allow the company to grow with minimal limitations.
Priceline, however, will remain a sound investment for years to come due to its demonstrated ability to make money. The company is far more profitable than Expedia and is likely to return to strong growth once the dollar starts weakening.
At this point, it seems like holding shares of both companies in a ratio of 2:1 or 3:1 in favor of Expedia is a prudent thing to do for long-term investors.