In the late 1990s, Priceline.com (Nasdaq:PCLN) was one of the first Internet companies to leverage sophisticated algorithms to build a business. At the core was something called the “Name Your Own Price” system, which was a way to balance supply and demand for hotel and flight reservations.
Since then, Priceline.com has gone beyond this initial focus and is now a global powerhouse. In its recent first quarter, revenue increased by 38.5% to $809.3 million and gross bookings spiked by 57.3% to $4.7 billion.
And of course, the stock price has been a winner. The average annual return was 77.9% for the past five years.
Let’s take a look at the pros and cons to see if Priceline.com can continue the good times:
Pros
Large opportunity. Even though online travel services have been around since the mid-1990s, there is still much room for growth. Even in the U.S., the penetration rates are still not at maturity levels. For the most part, there should continue to be a shift of purchasing to online methods because of the efficiencies.
Acquisitions. While deal-making can be tough to pull off, the benefits can be great if done right. This has definitely been the case with Priceline. If anything, acquisitions have been critical for its success. Perhaps the most important deal was the acquisition of Booking.com in 2004. The company is a top player in foreign markets for hotels.
But the Agoda acquisition has also been a big boost. The website provides hotel listings primarily in Asia.
Marketing prowess. Priceline has great commercials, which feature William Shatner. They have helped to build an enduring brand.
But the company also is effective at online marketing and search engine optimization. It’s something in which the company has made heavy investments.
Cons
Competition. The online travel industry has many operators. Some of the top companies include Expedia (Nasdaq:EXPE), Orbitz (NYSE:OWW) and Sabre. But there are also lots of fast-growing upstarts like Kayak.com and Hipmunk.com.
And of course, giant Internet companies are investing more in the space, like Google (Nasdaq:GOOG), Facebook, Yahoo (Nasdaq:YHOO) and Groupon. In fact, Google is acquiring ITA Software, which is a data provider for flight information.
Economy. Travel is highly sensitive to changes in the economy. For example, the recent surge in oil prices has resulted in higher airline ticket prices. It is also reducing overall disposable income for discretionary items like travel. (Oil prices recently plunged, but they still remain relatively high.)
Valuation. Priceline’s shares are trading at a high price-earnings ratio of 51. Interestingly enough, a Goldman Sachs analyst recently downgraded the stock because of valuation concerns.
Verdict
Over the years, Priceline has been flawless with its execution. And management was prescient to expand into foreign markets. All in all, it looks like the growth rates will remain strong.
No doubt, the valuation is hefty. But this is typical for a strong growth company – especially one that is likely to keep up the momentum. For investors, the pros outweigh the cons on the shares.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
