priceline.com (PCLN) is a leading online travel agency (OTA) that offers travel services worldwide, including airline tickets, hotel rooms, and vacation packages. The company was formed as a limited liability company in 1997 and incorporated in Delaware in 1998 under the priceline.com brand. It completed an initial public offering in 1999, and began trading on the NASDAQ stock exchange under the ticker symbol PCLN. Since then, the company has expanded beyond its flagship, priceline.com, to include several other travel brands, such as Booking.com and Agoda.com. Collectively, these brands are referred to as The Priceline Group.
Since its inception, the company has become the leader in its domestic (U.S.) market, owing largely to its Name Your Own Price offering, which allows customers to bid on travel services. Travelers can suggest a price for a particular item, and then Priceline communicates the offer to participating sellers, attempting to fulfill the customer’s request. This strategy has received wide acclaim from consumers, leading to strong brand loyalty, and thereby staggering revenue growth. Indeed, the top line has consistently expanded at a rate of more than 20% since 2006.
What’s more, Priceline’s margins are far wider than most of its competitors, notably Expedia (EXPE), which logs similar revenue growth. This is largely due to a greater mix of agency revenues at Priceline, (on which cost of goods sold is virtually nonexistent), than other online travel agencies, which tend to generate most of their top-line growth from merchant revenues. Agency revenues are derived from fees charged on travel transactions where the OTA is not the merchant of record, whereas merchant revenues are generated from services provided directly and the customer’s credit card is charged by the company itself.
Despite the brand recognition associated with its Name Your Own Price offering, which is the driving force behind Priceline’s domestic success, the emphasis on agency revenues comes from the company’s growing international operations. Indeed, Booking.com, the world’s largest hotel and accommodation reservation website, operates solely with an agency business model. Growing its international business has been a focus for Priceline for some time now, and given its strong cash balance, (close to $5 billion), it will likely continue to expand its portfolio of brands.
All told, we think Priceline’s outlook is quite bright. The company has a strong position in the travel market, which should strengthen even further as its international business expands. And although revenue growth may moderate a bit over the long haul, Priceline ought to continue to log healthy double-digit gains in the years ahead, keeping the competition at bay.
Meanwhile, the stock price has been on a steady upward trend since the 2008 recession, supported by healthy earnings growth, amid improving travel trends worldwide. In fact, PCLN shares are currently trading near the $800 mark. Even so, we think this equity still has room to run, given Priceline’s solid long-term growth prospects.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.