Priceline.com Inc (NASDAQ:PCLN) is the world’s largest Online Travel Agency (OTA) by sales. The company is a major player in the US market, which is expected to be a $180 billion market by 2016. Recently, the company has been taking some steps to increase its market share in the US. But beyond that, there are several other reasons that make us believe that this company has strong growth potential. Its stock recently fell more than 8%, from around $743 to $683 in just a few days, but despite this, we believe this company might be a good investment for long term.
The fourth quarter 2012 earnings report saw a diluted EPS of $5.63, compared to $4.41 a year ago. Gross travel bookings were $6.6 billion, an increase of around 33%. Its gross profit also saw a growth of around 30% over the same period. ROE for the company is 36.50 and ROA is 21.70. These high ratios suggest management’s effectiveness in managing capital. The company also has robust profitability ratios and sufficiently high liquidity ratios. These strong fundamentals will ensure that the company keeps producing better financial results in each quarter.
Priceline.com Inc (NASDAQ:PCLN) has been aggressively advertising online, with its annual online ad spending having more than tripled over the last three years to $1.27 billion (25% of revenues). This is done to compete with competitors like Expedia Inc (NASDAQ:EXPE) in the hotel bookings segment. This segment has been proving to be more profitable, due to dwindling margins in the airline industry. Revenue from the US and European hotel booking market is expected to jump 16% to $79 billion next year, from $68 billion in 2012. The spending though results in a lower operating profit, it is very essential to capture the maximum share of this growing market.
Growth in the European online travel market
Priceline.com Inc (NASDAQ:PCLN) is focusing on other markets like Europe and Asia Pacific, as growth in the US market has slowed down. The online travel market in the region grew by 9% as compared to 4% in US during 2011-12. It is expected to grow with a CAGR of 5.7% to $180 billion till 2016. Till now, Priceline has been present in the European market through booking.com, which accounts for only 6% of the European hotel market. As the European market is fragmented and has low OTA penetration, the region offers considerable growth opportunities. The graphics below gives the forecast (in billion) of the online travel industry in various regions till 2016.
Challenges going further
Some challenges for the company are rising customer acquisition costs and heightening competitive dynamics. Over the next three years, the growth rate of revenues might not match the growth rate in the last three years. This is true for any company that is maturing. EBITDA margins are also expected to fall. A shift to mobile bookings will also pose a threat to the company because of its expertise only in desktop bookings.
Google Inc (NASDAQ:GOOG) has been emerging as a
major competitor for companies in the online travel industry. It introduced a service called Hotel Finder that lets users search for accommodations on Google. It also bought ITA software to get flight prices and itineraries. Its services exclude online travel agent participation within the search results. Microsoft Corporation (NASDAQ:MSFT) has also launched Bing Travel. It is believed that current players, including Priceline.com Inc (NASDAQ:PCLN), might not be able to compete with these technology giants.
Expedia Inc (NASDAQ:EXPE) has gained tremendous brand recognition in Europe through Trivago. Due to strong fundamental performance, it has given its investors a return of more than 250% since March 2011. It is trading at a P/E ratio of more than 32, higher than industry peers. Its EPS growth forecast for the next five years is around 6%. The stock is not expected to give considerable returns to its investors in the near future, but for the long term perspective, it may turn out to be a profitable investment.