- The Dollar bull market is over. We may get a temporary bounce but I foresee a weaker currency which is bullish for Priceline stock.
- Airbnb will not threaten Priceline as much as many analysts think. In fact, many Airbnb users are heavy hotel users also.
- Fundamentals and valuations still remain attractive. The OTA industry is still undoubtedly in a growth stage which will benefit Priceline.
Although Priceline Group Inc. (NASDAQ:PCLN) delivered a strong first quarter in my opinion, investors were disappointed with the company's guidance which ended up sending the stock lower by more than $100 a share. When scenarios like this take place, I always try to ascertain whether the company's (or sectors) fundamentals have changed or guidance not meeting analysts expectations is a temporary phenomenon. I believe its the latter for a few reasons. First, I believe guidance was worse than expected because of timing and market issues and not fundamentals. Why? Well, previous quarters have been very strong and although revenue growth is sliding (mainly due to the strong dollar), booking growth is still strong. In fact, room growth spiked to 31% which was 4% higher than last quarter. Furthermore, other metrics (property growth of 31%, operating margin growth of 200 points, and agency sales margin growth of 0.2%) all clearly demonstrate an up-trending market and the company's increasing dominance in this sector.
What I have always liked about Priceline over the past few years has been its relentless currency neutral growth despite having to deal with a strong dollar. Many US multinationals may still be growing (on a volume or unit based sales basis) but on a currency neutral basis have been unable to grow in strict US dollar terms. Not the case with Priceline. This company has still grown in dollar terms despite bringing in over 88% of its top-line from international markets. Now if we look at a chart of the US dollar, we can see that long term support of around 93.88 has been penetrated which is the first time this has happened since January 2015. I see us getting a weak bounce here but we will most definitely not take out last December's highs of more than 100 on the dollar index. Long term, this is bullish for Priceline. Expect revenue growth levels to return to former numbers once we see the dollar index at sub 90 levels.
Secondly, if you are a Priceline investor, I wouldn't read too much into the explosive growth Airbnb is enjoying at the moment. Why? Well, a recent Cowan study (that surveyed over 1,400 US travelers) illustrated that although the majority of the participants stated that they prefer the Airbnb experience, they also said that they continue to use hotels at even a higher rate than the average hotel customer. This data definitely doesn't speak of cannibalization but actually of heavy users branching out into other options when the opportunity presents itself. Priceline has seen this trend which is why it continues to invest heavily in alternative accommodations to ensure it is giving the maximum number of options to its clients. Long term, you would have to back Priceline's pricing power if the alternative accommodation market really became competitive, but as we stand, Airbnb is merely showing the extra market share Priceline can attack in this up trending market.
Currently, Priceline has an earnings multiple of 24.6 and a sales multiple of 6.7 which are well below historic averages. Gross margins are now at a record high 94% and annual free cash flow has topped $3 billion. Earnings per share have gone from $1.68 in 2006 to a current trailing twelve month average of $50.81. Furthermore, there has been no financial engineering with these figures over the last 10 years as the share count has remained relatively constant over the last 10 years. Some bearish analysts have stated that rising debt levels will become an issue at the company but this is nonsense in my opinion. Yes, the debt to equity ratio spiked to 0.7 after the first quarter but Priceline has a current ratio of 2.45 and a quick ratio of 2.13. In fact, these liquidity numbers are conservative when you compare them to 2006 numbers (debt to equity reached 1.64) but that didn't stop the travel company from doubling its earnings the following year. Case in point: The up-front cash producing business model won't deter the company from spending more temporarily when it sees growth opportunities which is why you will see liquidity ratios bounce around over time.
To sum up, Priceline stock looks attractive at these prices for a variety of reasons. Firstly, the dollar bull market is toast in my opinion although we are due a slight bounce. Secondly, the growth trend tailwinds are showing no signs of slowing down and thirdly the company's fundamentals and valuations have never been better. Use the recent dip in Priceline stock price to go long would be my recommendation here.