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David Rolfe of Wedgewood Partners Comments on Priceline.com

January 29, 2013 | About:

Priceline.com (PCLN) was added to the Fund during the 4th quarter and after a multi-month decline from the stock's all-time high. Priceline.com is an online travel agency made up of a several of online properties such as TravelJigsaw, Agoda and, of course, Priceline.com, but generates the vast majority of its profitability from its internationallyfocused, hotel booking site, Booking.com. We think that Priceline.com has been able to generate superior ROIC, relative to its peer group, because of its rapidly increasing scale in the international hotel industry, which is a highly fragmented market. Rather than face the daunting task of advertising across several different languages, cultural preferences and mediums, over 200,000 of these international hotels have turned to Booking.com to list inventory.

In turn, this inventory consolidation has made Booking.com much more relevant to more international travelers, with the site hosting over 30 million unique visitors per month, a multiple of the site's closest rivals, as we estimate. This traffic has built up over the years, particularly as the Company has aggressively reinvested in a formidable search engine optimization program, particularly with Google, and boasts that a relevant search term by a customer almost always places Booking.com ads at the top of Google searches. Priceline.com's online advertising budget routinely exceeds 25% of gross profits and in the most recent 12 months they spent over $1 billion, most of it on search engine optimization, so this visibility is expensive but very few competitors have the resources and scale to achieve it.

We think Priceline.com's opportunity for double-digit growth is robust, as they have tapped into only a fraction of worldwide hotel supply and demand. Also with its ample financial strength, the Company recently purchased Kayak, a travel-focused search engine that drove over 10% of Priceline.com's traffic during the past 12 months, at a cost of a little more than 5% ($1.8bn) of Priceline.com's market capitalization.

However, the Fund also has a sizable position in Google (GOOG), so Priceline.com introduces competitive overlap risk, but we think it is minimal. For instance, if we assume Priceline.com's entire online marketing budgets were allocated to Google; it would amount to less than 3% of Google's trailing 12-month operating profit. So while the two Companies are competing for the same dollar of profitability, we see it as an acceptable level of risk, given the vast potential of their respective businesses.

From Wedgewood Partners' fourth quarter letter.

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