Has Priceline's Growth Tapped Out?
With all the advantages that an Internet company has over its brick-and-mortar competition, there's little reason for any entrepreneur to choose the latter business over the former when it comes to selling products and services. For starters, web companies may not necessarily even need to sell anything except middleman services; they may be able to dodge all the heat of an unsatisfactory product or experience; they may be able to profit with as simple a measure as getting a customer to click on a button in an email. All of these factors turned Priceline, the world's largest search engine for flights, rentals, and hotels into one of the very best stocks in the past decade to keep in a portfolio. Priceline's value has grown by nearly 300% since 2010 alone, beating out the market sixfold and turning into one of the true winners of the post-dotcom-crash era. With all of Priceline's good news in the past, how much more room does the company have to grow?
Price and Performance
Like many of their Internet business fellows, Priceline felt the collapse of the web industry in 1999 particularly hard. Their stock price (PCLN on the NASDAQ, trading for $1257 a share) fell to practically nothing between 2000 and 2005, pushing the company perilously close to bankruptcy (or worse, potentially, into penny stocks). Then came 2010 and the explosion of the mobile market. Few companies tethered their horse to mobiles like Priceline, introducing an app that allowed you to get a hotel room as you walk off the runway of a plane or a rental car while you wait for an estimate at the repair shop. Their advertising, in turn, proved so successful that even if you don't watch much TV, you probably know their litany of commercials feature William Shatner and foxy blonde Kaley Cuoco. Priceline beat out their biggest competitor, Expedia, by aggressively expanding overseas. Today, the international Priceline revenue comes in just shy of ten billion, while Expedia can't match even half of that number. Better still, their business plan allows them to double up their fees at practically every turn. They get bids from hotels to be featured on the Priceline landing page, while any sales from the hotels forward a cut of the cash back to the Priceline site that they had paid for promotion. The company gets affiliate ad space from companies that profit off the back of tourists and business travelers, making it easy to forge business connections without paying for the privilege. Without the need for any type of physical inventory and requiring only a bare minimum of employees to keep their operations moving, Priceline can pocket one in every three dollars that comes into their till, a profit margin that Fortune 500 companies would kill for. Nor are there concerns about cost of scale, for in the Internet business bigger always remains better. Their main booking program features nearly one million hotels in 220 companies, growing by a phenomenal rate of 35% a year.
A bevy of strong metrics through 2015 indicate that Priceline has ample room still to grow and provide dividends to investors. They've seen an 11% growth in Q2 compared to 2014 and a 26% growth in bookings overall. Their rental car booking rates have been driving the bus (literally and metaphorically), with twenty percent growth compared to just .3% growth in airline bookings. The lower cost of gas, the newfound productivity of American automakers, and the number of business travelers looking to cut costs by driving rather than flying all indicate that their rental car market will be quite strong for the immediate future. Perhaps the only worrying trend, if you can even call it that, is that third of all bookings on Priceline take place from a mobile device, below the 50% rate enjoyed for online sales overall. Yet that doesn't put Priceline behind the curve, since their management has announced plans to modify marketing and customer experience so that half of all their sales will come from mobile devices by 2017.
All of the indicators that Priceline performs well ignore the first rule of investing: buy low and sell high. Priceline's already plenty high, meaning that investors should only buy in if there's reason for it to get much higher. At the moment, all signs point towards a positive. The price to earnings ratio sits at about twenty times the company's earnings forecast for next year, a slightly better performance than most Fortune 500 companies with the most consistent growth (the magic number of 15 usually determines whether a company will do better or worse on the market). Their price ratio relative to cash flow, helped along by the aforementioned 33% profit rate, also suggests that there's not much risk in financial shortage for their operations. Finally, the company has had a mini-slump in September, dropping from a three-year max to hover at almost the exact 52-week average. As such, it won't get much lower than if you buy today.
- The Takeaway: great for any portfolio, Priceline offers solid growth with fantastic prospects and much less variance than most high-profile Internet businesses. As travel increases on a yearly basis, they stand at the forefront of the web travel industry by connecting customers with companies, taking a very large cut while carrying very little risk. No matter what your investment needs, picking Priceline up represents a smart buy.
- Remember that a company's success doesn't necessarily mean success for its business partners. For instance, the Hilton Hotel chain is the largest ace in Priceline's hand, but their stock has downright collapsed in 2015. Be careful investing in the most-promoted partner of a successful enterprise, since it may not turn out the way you wish.