Priceline Soars; Will These Stocks Follow?
Priceline (NASDAQ: PCLN) briefly crossed the $500 threshold in intraday trading, climbing to $501.60 at its apex as investors remained attracted to the company's enormous profit margins and dominant market presence. Although the stock has since fallen to under $500, some investors may expect a return to the psychologically important mark after the stock broke through that ceiling.
Priceline has maintained a steady rice in value since 2007, with major gains in the last three years thanks to a jump in sales, which climbed past the $3 billion mark in 2010 and is set to topple $5 billion this year. The increase is largely thanks to increased demand for air and hotel reservations, with hotels seeing revenue growth over 7% in December 2011.
Priceline has benefitted from a large international presence, with brands covering growth markets such as Agoda, which specializes in Asian markets. The company also owns Booking.com, which has helped the company expand its international market share with a 41-language interface and a network of over 180,000 hotels. Growth of the company's Booking.com brand exceeded analysts estimates, while the company's earnings have also excelled beyond expectations in recent years.
Growth in the company has helped its P/E ratio decline to a reasonable 26.4, down from over double that in 2009. That ratio is expected to fall further as the market cannot keep up with the company's earnings.
Not all is rosy with Priceline, despite some analysts forecasting a price target of over $600 per share. To fuel growth, the company has focused on international markets, which means it is more exposed to fragile European markets at a time when pessimism in eurozone countries is higher than ever. The company is also at risk from alternatives such as Google's new Google Flights service, which is expected to offer international flights in the near future.
Agencies are also being challenged by airlines, who would prefer that customers book directly through them. In 2010, American Airlines (Parent company AMR Corporation, PINK: AAMRQ) experimented with severing all ties with online agencies by no longer selling tickets on Orbitz (NYSE: OWW) although the company reversed the decision four months later after Expedia (NASDAQ: EXPE) refused to sell American Airlines tickets to support Orbitz.
Those potential downsides haven't stopped Priceline from reaching a level it hasn't seen since 2000. Investors might start to look at other online travel companies in the hopes that they will capitalize on the growing demand for hotel rooms and airplane tickets. Expedia saw its shares split and the company has begun offering dividends--a rare move for a dot com stock. The stock is near its 52 week low of 27.28, but a steadily growing net profit margin that climbed to 18.44% might translate into higher stock prices in the near term, especially since the company's P/E ratio is about a quarter of Priceline's, at 8.75.
A higher profit margin can be found in Tripadvisor (NASDAQ: TRIP), which is trading near its 52-week range at around 29.15. With a market cap of 3.62 billion and a Chinese brand (daodao.com) growing in popularity, the company has maintained a steady growth in its stock price since Expedia spun off the brand in late December 2011.
Orbitz has been hurting the most of the online travel companies, with sluggish sales growth and a negative EPS thanks to a negative operating margin. The company is struggling to return to profitability and the stock is facing low liquidity thanks to lackluster investor interest. After recently announcing revenue figures below analysts' estimates, with expected net revenue of just $170 to $174 million, the stock hasn't been able to take off even as Priceline soared.
Looking ahead, investors will need to look at the online travel company sector carefully to see if these companies can translate rising demand for hotel rooms and airline tickets into profits.
Traders who believe that growing travel demand will benefit the online booking companies might want to consider the following trades:
- Buy and hold Priceline as a consistent performer. The company's dominance of the market might translate into higher profits as domestic and international consumers return to it as a major platform for their travel needs.
- Buy Orbitz as a speculative bet in the hopes that its sales woes are short-lived. If the travel sector is going to see real gains across the board, Orbitz may have more move to climb than its competitors, thanks to its recent slump. However, with a recent fall of earnings guidance, this is a tricky move.
- To invest more broadly in the travel sector, you could consider Powershares's leisure and entertainment ETF (NYSEARC: PEJ).
Traders who think that Priceline's jump is short lived may want to think about some alternative moves:
- Short Priceline in the hopes that its new high won't last and the psychological barrier of the $500 mark proves an impassable hurdle for the stock.
- Wait and see if the problems in Europe start to impact the travel companies' growing reliance on international markets.
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