Priceline Upgraded By Morgan Stanley: 'The 4-Year War Is Over'

Morgan Stanley’s Brian Nowak believes Priceline Group Inc PCLN would witness improving ad efficiency, which in turn would drive rising profitability and alt. accommodations.

Nowak upgraded the rating on the company from Equal Weight to Overweight, while raising the price target from $1,330 to $1,525.

‘The 4-Year War Is Over’

The analyst believes following four years of decline, Priceline’s ad spend ROI has stabilized in 1Q16.

Nowak attributed this to the lower cost per click (CPC) competition between Priceline and Expedia Inc EXPE, “as the two leading OTAs show the first signs of acting as rational players in a global duopoly.”

Related Link: Historically, Priceline's Guidance Doesn't Align With Reality

Morgan Stanley’s Google (Alphabet Inc GOOG GOOGL) travel keyword CPC analysis further supports this, with CPCs down 50 percent year-on-year.

Growth

On the other hand, the ROI metric, Priceline’s incremental booking per incremental ad dollar, has been improving, growing 78 percent year-on-year in 1Q16.

“We see this more rational ad environment enabling this to continue, and we lower forward ad spending, now expecting PCLN's adj. EBITDA margins to rise in '16 for the first time in five years,” Nowak stated.

With online travelers increasingly shopping for hotels and alternate accommodation, Nowak expects Priceline, with its over 422,000 vacation rentals, more than twice the user reach advantage, leading hotel selection and best in class traffic acquisition and conversion, to be well positioned to capture meaningful market share in alternate accommodations.