Current Price: $2,045 Price Target: $2,400
Position Size: 3% TTM Performance: 20%
Bookings reported a better top and bottom line but guidance disappointed. Total bookings for the quarter increased 21% to $25B (+12% constant currency). The source of the disappointing 2Q guidance is expectations of decelerating room night growth (+7-11% vs +13% in 1Q) caused by a reduction in performance advertising spend. Performance ad spending is primarily with Google and to a lesser extent with sites like TripAdvisor and Trivago. They are making a deliberate trade-off in reducing costlier (and fading ROI) performance ad spend, despite the impact to room night growth. The benefit is hitting margins and was the cause of the big EPS beat. This strategy is not new – rising advertising costs have been a theme across the industry and their response is consistent with what they have said the last couple quarters and is not a surprise. They are shifting ad dollars to brand advertising (like TV) in an attempt to get more direct traffic to their site as the ROI on performance advertising has gone down and as a result direct traffic is increasing as a % of the mix. After last quarter, many speculated that this may disrupt room night growth – which it has. The long-term thesis, however, is intact and they still have plenty of runway for growth.
Alternative accommodations an increasing focus:
· They continue to rapidly expand their alternative booking supply.
· They now have an inventory of over 5 million homes, apartments etc., up 28% YoY.
· This could be a meaningful part of their business longer term.
· This tends to be more merchant basis which has a favorable working capital impact, increasing FCF margins.
Valuation:
· They continue to generate solid FCF and growing FCF margins.
· The stock is still undervalued, trading at about a 4.5% FCF yield.
· Stable margins going forward and mid-single digit growth, leads to a DCF valuation of about $2,400.
Thesis:
1. Priceline is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.
2. PCLN has several competitive advantages relative to Online Travel Agent (OTA) peers:
· Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
· They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
· Strong position in China/South East Asia via Ctrip and Agoda
3. Priceline’s addressable market is growing driven by: 1.) Alternative accommodations 2.)
Increased penetration (growth of mobile/internet) 3.) Global growth of travel spend > GDP.
4. PCLN’s asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.
$BKNG.US
[tag BKNG]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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