Priceline Might Reap Benefits Of Its Strategic Investments In The Fourth Qaurter, However, Weak Euro Likely To Thwart Growth

February 17th, 2015 by Trefis Team
PCLN: Priceline Group logo
PCLN
Priceline Group

Priceline Group (NASDAQ:PCLN), the online travel giant and the owner of Booking.com, Kayak and OpenTable, is set to release its fourth quarter earnings on February 19th. Judging from what was reported thus far, Priceline experienced a healthy 2014. For the first nine months of 2014, the Group reported revenue of $6.6 billion, reflecting 25% year-on-year growth. This was aided by a 32% increase in the gross bookings (which refers to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers) to $39.6 billion. The growth was broad-based, with increases of 29% in hotel room nights, 19% in rental car days and 17% in airline ticket volumes. The effects of this revenue growth also boosted the bottom line. The company’s net income for the first nine month stood at $2 billion, 33% higher compared to the year ago period. [1]

Priceline has guided to a slow to moderate pace of growth in Q4 2014, primarily because of the scenarios affecting its operation in recent times. The threat of Ebola and certain Asian disasters like the fire in Vietnam and Malaysian Airlines accidents, have slowed  international travel. In addition, the weak Euro exchange rate continues to dampen its performance in the European regions. This has led to an expectation of a slowdown in the Q4 2014 performance by the company. [2]

Recently, the Priceline stock has been bearing  the brunt of the euro weakening against the U.S. dollar. Almost 90% of Priceline’s gross profits are generated from the international markets.  Hence, the weakening of the euro has always been a cause for concern for Priceline. The stock went down by  almost 6% in the last three months. On January 7, the euro was down to $1.18, a decline which was never reached since 2005. The euro zone consumer price indices fell for the first time since 2009 and it is feared that the European Central Bank might advance a quantitative easing program to thwart deflation. [3]

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However, if we focus on the long run, we expect Priceline to steer ahead in its performance trajectory, backed by its strategic investments and global partnerships.

We will update our price estimate of $1108 for Priceline’s stock, after the fourth quarter earnings release.

See Our Complete Analysis for Priceline Here

Enhanced Partnership With Ctrip Will Boost Priceline’s International Hotel Booking Segment

In August 2014, Priceline strengthened its commercial partnership (initiated in 2012) with Ctrip (NASDAQ:CTRP), the biggest Chinese online travel agency (OTA),  by investing $500 million in the company. Through the investment, both the companies intend to increase the cross-promotion of each other’s hotel inventories and other travel services. Priceline now has access to Ctrip’s 100,000 accommodations in the Greater China region while Ctrip has access to Priceline’s global portfolio of over 500,000 accommodations. [4] Additionally, Ctrip has agreed to promote Priceline Group’s other services, like rentalcars.com and OpenTable, to its customer base. Apart from online travel, Ctrip’s foray in China extends to call centers, logistics and distribution. This unique sales model will offer a comparative advantage to Priceline’s products within China. [5] Priceline earns approximately 95% of its revenue from hotel bookings. Thus, gaining access to Ctrip’s  wider portfolio of hotel booking in China, which is the fastest growing travel market in the world, will augur well for Priceline’s long-term growth potential, in our view.

Priceline Forayed Into The Restaurant Reservation Business By Buying The North American Leader, OpenTable

In June 2014, Priceline announced its decision to acquire OpenTable for $2.6 billion. OpenTable helps restaurants to fill tables by offering online reservation services to diners. The acquisition marks Priceline’s entry into the online restaurant reservation business, a category in which OpenTable is a leader in North America, with over 50% market share. [6] We expect that OpenTable will allow Priceline to enhance its offerings for the North American market. Since many travelers are also diners, the company could integrate OpenTable’s services with its travel products.

Fun Rides Will Increase Priceline’s Exposure To The Car Rental Segment

In June 2014, Priceline launched a premium car rental service named Fun Rides. Fun Rides allows customers to choose from a lineup of luxury sedans, muscle cars, sportsters, convertibles, hybrids and minis for special occasions, such as vacations, weddings or road trips. The new offering has been made available at airport locations in 63 major markets across the U.S., from several suppliers including Avis, Budget, Hertz and Sixt. [7] The global car rental industry is presently valued at $36.9 billion  and is expected to grow at a compounded rate of 13.6% to reach $79.5 billion by 2019. [8] Fun Rides is expected to increase Priceline’s exposure to this industry.

Booking.com Might Be At A Slight Disadvantage After The Revisions Of European Rate Parity Clauses

Priceline released a Securities and Exchange Commission filing on December 15, 2014, stating that Booking.com is considering the revision of its existing “rate parity” clauses (also referred to as “most favored nation” or “MFN” provisions) with hotels in Europe. This was in response to a probe by antitrust regulators in France, Italy, and Sweden. The proposed revision still maintains (similar to the existing agreement) that hotels need to offer same or better rates to Booking.com and other OTAs, than those offered on the hotels’ own websites. However, under the new agreement, hotels are free to provide better rates to other OTAs, than those offered to Booking.com. This might erode the competitive advantage of Booking.com – the world’s largest hotel booking website – to some extent. [9]

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Notes:
  1. Priceline’s Form 10-Q for the Period Ending 09/30/14 [↩]
  2. Priceline Group’s (PCLN) CEO Darren Huston On Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Nov 4, 2014 [↩]
  3. Priceline Group (PCLN) Shares Fall As Dollar Strengthens Against Euro, Bidness etc, January 7, 2015 [↩]
  4. The Priceline Group and Ctrip Expand Partnership, Ctrip Investor Relations, August 6, 2014 [↩]
  5. Expedia (and others) will be affected big-time by Priceline-Ctrip marriage, tnooz.com, August 8, 2014 [↩]
  6. The Priceline Group Agrees to Acquire OpenTable, Inc., Priceline Investor Relations, June 13, 2014 [↩]
  7. Priceline.com Gets Drivers’ Adrenaline Pumping with New Lineup of Specialty and Luxury Rental Cars, Priceline Investor Relations, June 23, 2014 [↩]
  8. Global Car Rental Market is Expected to Reach USD 79.46 billion in 2019: Transparency Market Research, PR Newswire, June 25, 2014 [↩]
  9. Booking.com Tries to Make European Regulators Happy, Ends Up at Disadvantage, Skift, December 15, 2014 [↩]