Credit Suisse On Priceline: You Have To Spend Money To Make Money

Priceline Group Inc PCLN reported its 1Q16 results ahead of expectations. Credit Suisse’s Stephen Ju maintained an Outperform rating for the company, while reducing the price target from $1,600 to $1,580. The analyst mentioned that Priceline’s 2Q guidance missed expectations because of a shift of bookings to other quarters and higher brand advertising spend.

Priceline reported its quarterly gross bookings at $16.7b, significantly higher than the CS estimate of $15.9b. Gross profit came in at $2.02b, beating the CS estimate of $1.93b. The company reported adj. EBITDA of $676.3m, beating the consensus expectation of $622.2m and the CS estimate of $601.7m.

Take On Disappointing 2Q Guidance

Priceline announced disappointing 2Q16 guidance, with the high-end for x-FX total gross travel bookings reflecting 18 percent y/y growth and gross profit dollars reflecting 16 percent y/y growth. Both were short of expectations.

The guidance parameters suggested significant deceleration from 1Q, exerting pressure on Priceline’s shares. Management indicated that 2Q would be impacted by a shift in bookings out of 2Q and into 1Q or 3Q because of the shift in dates for Easter, Ramadan and Euro2016. These are “ultimately transitory shifts,” analyst Stephen Ju noted.

The second quarter is also expected to be impacted by a step-up in brand marketing, as Booking.com attempts to gain market share in the US.

Ju commented, “While we believe the amount of brand advertising spend as well as deleverage in performance advertising required to get to guidance parameters seem excessive, we expect PCLN shares to be range-bound in the near term - until the next quarter's results for investors to receive the definitive proof point that there is an additional level of conservatism in the guidance.”