Priceline’s Guidance Deflates The Surge In OTA Stocks
Priceline (NASDAQ:PCLN), a leading online travel company, reported its Q2 2012 earnings on Tuesday, August 7. The company registered a 27% y-o-y increase in gross bookings and posted $405 million in net income, which was up 43% compared to Q2 2011. On account of growth in hotel bookings and an increase in retail rental car reservations, Priceline’s domestic gross bookings registered a 5% y-o-y growth rate. Though the international gross booking recorded 44% y-o-y increase in gross bookings, the growth rate registered a marginal decline from the first quarter.
Slowing growth in Europe, a decline in hotel ADRs, an unfavorable exchange rates and challenges faced by the “Name Your Own Price” services – are some of the factors that weighed on Priceline’s growth this quarter. Priceline has a relatively large portion of its business in European countries experiencing weak economic conditions, which has been one of the prime factors negatively impacting its overall growth rate.
Weakness In Europe Impacts Hotel Bookings
Post the acquisition of Bookings.com in 2005, the company has been steadily increasing its share in the European market. Key European markets represent around 60% of Priceline’s total booked room nights, and we estimate hotel booking to contribute over 87% to the company’s valuation. Thus, though the weakness in European economies impact the online travel industry as a whole, we feel that Priceline is probably the most sensitive to any adverse developments in the region due to the high contribution of hotel booking from the European markets to its revenues.
The company’s opaque booking option – Name Your Own Price – faced increased competition in the discount space. Additionally, the limited supply that resulted from declining air capacity as well as low retail prices for air tickets and car rentals, lessened the relative value proposition of the company’s offering.
However, Priceline is hopeful of “Express Deals” gaining positive traction in the market in the year ahead. With the launch of “Express Deals” last quarter, it aims to target customers not willing to experiment with the bidding process and yet looking for attractive discount deals. (Read Related Article: Priceline Leverages Growth In Hotel Bookings With Express Deals) The potential increase in the company’s customer base can contribute to higher revenues in the future.
Though, the hotel room nights booked via Priceline decelerated marginally compared to the previous quarter, we feel that at 39% the growth rate still remains strong, especially amid the current macroeconomic headwinds. Priceline has a strong footing not only in Europe, but also in other international markets such as the Asia-Pacific region. With existing brands such as Booking.com and Agoda, combined with innovative booking options such as “Express Deals” and “Name Your Own Price”, we believe that Priceline will be able to slightly increase its market share by the end of our forecast period.
Weak Q3 2012 Guidance
Estimating the macroeconomic conditions in Europe to deteriorate further and a weaker transaction growth rate in ADR trends spreading to other markets in Europe, Priceline estimates the growth rate in gross bookings to significantly drop down to 10%-18%. The company also foresees a downward pressure on margins in Q3 2012 on account of de-leveraging the online advertising expense.
However, Priceline continues to grow at a healthy rate and the fact that it registered strong growth in America as well as the Asia-Pacific region is reminiscent of the brands growing and improving platforms. We continue to believe that Priceline will register strong growth in 2012, albeit at a slower pace compared to 2011.
We are in the process of updating our current price estimate of $561 for Priceline, post the Q2 2012 earnings.
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