The Priceline Group (PCLN, Financial) has enjoyed fairly steady share price appreciation for a couple years. Impressive financial performance and solid growth have seen the online travel booking company win many admirers. Some recent converts include David Gardner, of Motley Fool fame, who has added it to his list of favored growth stocks. JPMorgan (JPM, Financial) issued its own note of confidence on Monday, Dec. 18, increasing its price target to $2,050, up 5% and 16% from from the investment bank’s previous target and Priceline’s Friday close, respectively.
Yet the positive notes are colored by recent slippage in Priceline’s share price. Is Priceline’s future as bright as some believe, or is the recent decline a sign of tougher times ahead? Let’s see if we can sort out the facts to determine whether the price is, in fact, right.
A history of beating financial expectations
Priceline has turned in a moderately strong financial performance over the last year. Strong revenue numbers, increasing profit, and an expanding client base have all begotten growth of the bottom-line.
Beating consensus earnings forecasts seems to have become something of a hobby for Priceline of late. The company has successfully beaten market expectations four quarters running. From fourth quarter 2016 through third quarter 2017, Priceline turned in positive earnings surprises of 8.81%, 11.89%, 6.25% and 2.65% in each quarter, respectively. Not a bad track record.
In November, Priceline released its third quarter 2017 earnings report, which failed to disappoint when it came to performance for the quarter. Gross profit reached $4.4 billion and non-GAAP net income of $1.8 billion, up 22% and 19% from the year prior, respectively. The overall strong growth numbers hid some worries: Compared to the year-ago quarter, growth in room bookings and car rentals had slowed – though were still positive. Overall, it was a very positive picture of corporate health and growth.
If Priceline can continue to drive that growth by expanding its customer base and offerings, especially into international markets, a bright future lies ahead. Unfortunately, the company’s own forward guidance has been cause for investor concern.
A future clouded by weak guidance
Despite beating all expectations in third quarter 2017, Priceline’s shares fell 9% in after hours trading the day of the earnings announcement. They proceeded to drift down further still in the next trading session. A recovery has since ensued, with shares up about 8% from the post-earnings bottom. Still, shares are down more than 6% from before the earnings report.
The reason for the fall, despite posting a solid third quarter, was weak guidance for the quarter ahead. For example, Priceline forecasted growth in room nights booked between 8% and 13%, which disappointed analysts whose consensus was for growth of 15%. Year-over-year growth in fourth quarter 2016 had been 31%. The slowdown has definitely given some parts of the market a case of the willies.
Challenges lie ahead
Priceline faces two key challenges to its continued explosive growth story. First and foremost is the threat of mounting competition. Competition in any business is stiff, but it rarely gets any stiffer than in the travel industry. Dozens of airlines and airline-booking sights compete for travelers’ business. Priceline faces competition from one major competitor in the same space, Expedia (EXPE, Financial), as well as from the various airlines, hotels and rental car companies themselves. With the advent of Google (GOOGL, Financial)'s Google Flights and Hotel Finder, it is becoming easier every day to do without a standard booking site.
The second challenge is the product of the tyranny of high expectations. Priceline is facing a hurdle many growth stocks have had to confront in one form or another. After a long string of defying expectations, simply meeting them can seem like failure, creating its own negative pressure on the high-flying stock. It is even worse when one fails to meet expectations at all, as in the case of the Priceline’s fourth quarter 2017 guidance.
Is the price right?
Priceline has not been alone in feeling the pain lately. In fact, fourth-quarter earnings targets were revised down across the travel services industry. While there may have been a short-term play after the big sell-off in November after the guidance panic, the stock has recovered from worst of the market’s irrational negativity. Still, shares are at a significant discount to where they were.
With any true growth stock, growth is by definition an important part of the price. A decent discount from a recent high does not a value play make. Yet at the same time, a price-to-earnings ratio of nearly 25x – while high by traditional standards of valuation – does not look so bad in the current euphoric stock market. Certainly, compared to Expedia, its closest industry peer, Priceline looks mighty cheap. The rival online travel firm trades at a price-to-earnings ration of nearly 48x.
So what should an investor do? For a hunter of value in the bargain bins of the equity market, Priceline is probably a pass. Yet, given its strong growth history and pursuit of fresh customers in markets around the world, Priceline looks to have a lot of room to grow and may just about deserve its price multiple. As more people, in the U.S. and farther afield, turn to websites for their travel needs, the market for Priceline’s services can only expand.
The price might be just about right after all.
Disclosure: I/We own none of the stocks discussed in this article.
