Factors Responsible For Our Revised Price Estimate For Priceline

We have upgraded our valuation for leading Online Travel Agency (OTA), Priceline (NASDAQ:PCLN) from $642 to $1150. Our new price estimate for Priceline is now inline with the current market price. Despite the large size of its business and uncertain global economic conditions, the company continues to witness strong growth every quarter. Consistent growth, along with the acquisition of Kayak has significantly lifted Priceline’s stock price from the 2013 level.

Below we list down the changes we have made to Priceline’s model.

See our complete analysis for Priceline

1. Higher Hotel Bookings Market Share (~55%)

In our old model, we expected Priceline’s share of worldwide hotel room bookings to increase from 3.9% in 2012 to 4.3% in 2013. However, according to our estimates the company’s share climbed to over 5%. (Read how we calculate market share here) We now estimate Priceline’s market share to reach 8% by the end of our review period compared to our initial forecast of 4.7%.

Some factors supporting our view are:

– The Rapidly Expanding International Footprint

The rapid increase in international bookings, especially hotels, has been one of the most important drivers behind Priceline’s growth momentum. We initially expected the growth in international bookings to slow down considerably towards the second half of 2013, due to the increasingly large size of Priceline’s business and historically high growth rates. However, international gross bookings continue to grow at a healthy rate.

The acquisition of Booking.com (2005), Agoda (2007) and TravelJigsaw (2010) has significantly helped Priceline in expanding its international business. Gross bookings from international markets as a percentage of total bookings have gone up from 55% in 2007 to around 85% in 2013. In absolute terms, while domestic gross bookings have nearly tripled since 2007, international gross bookings have increased over tenfold. Priceline’s aggressive focus on high-growth international regions helped the company register 36% year-on-year growth in international gross bookings in Q2 2014.

Priceline’s strong performance in international markets was largely driven by the success of Booking.com in Europe—Booking.com has 31% share of the European online travel agency (OTA) market—and Priceline’s increasing penetration in high-growth emerging markets including Asia-Pacific and South America. Priceline is pursuing aggressive expansion activities in Asia-Pacific by adding inventory, enhancing mobile functionality and localizing content at Agoda.com. Agoda is gaining preference as a leading site among Asia-Pacific bookers. This has helped the company to evade the anticipated slowdown. The company increased its hotel supply by 58% in Q2 2014, to end the quarter with an inventory of 525,000 hotels and accommodations in 205 countries. We believe that international markets will continue to be the primary growth driver for Priceline in the near future.

– Strengthening Business In The U.S.

Pricelines domestic business (US) is also experiencing acceleration due to increasing brand awareness, the addition of hotel supply and a greater integration with Kayak.

While Priceline has successfully gained share in international markets, it has lost out to Expedia (NASDAQ:EXPE) in the domestic landscape. Priceline has a 16% share of the U.S. OTA market compared to Expedia’s 40% market share. ^[1] Priceline is taking different routes to increase its share. The company launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year.  It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. Furthermore, it acquired Kayak which has helped increase its brand visibility in the U.S. We expect the domestic bookings growth to accelerate in the future.

2. Model Adjustment For The Acquisition of Kayak (~10% Upside)

With the $1.8 billion acquisition of Kayak in Q2 2013, Priceline marked its entry into the meta-search space. Kayak derives revenues primarily from advertising. The company receives about 80% of its total revenue ($292 million in 2012) from the U.S. and has over 50% share of the country’s meta-search market. Its top-line has grown at a compounded annual rate of over 40% since 2007.

Kayak added approximately $150 million to Priceline’s advertising revenues from its date of acquisition to the end of 2013. We estimate that advertising revenues will more than double in 2014 since Kayak will bring in revenues over the complete year. Thereafter, we expect to see double-digit growth rates as Priceline helps Kayak expand across the globe by providing it the necessary resources and the expertise that were not available to it as a separate entity. Apart from adding more juice to Priceline’s advertising business, we believe that Kayak will help Priceline attract more traffic to its websites.

Prior to Kayak’s acquisition, advertising accounted for less than 1% of our valuation for Priceline. After adjusting our model for the acquisition, advertising accounts for slightly more than 5% of Priceline’s value.

3. We Extended Our Forecast Period By An Year, To 2021 (~5% upside)

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1. PhoCusWright: Online travel spending on the rise in Europe, Travel Weekly, January 15, 2014 [↩]