Hotel and travel bookings website Priceline.com (NASDAQ:PCLN) has experienced a choppy year. The company has achieved the enviable position of the number two travel booking site in the world after Expedia (NASDAQ:EXPE). The company has focused primarily on hotel bookings which contribute to 90% of the stock price according to our analysis and is starting to expand aggressively abroad. However, the fate of the stock has oftentimes followed global economic sentiment. Recently reported earnings however showed that its underlying business momentum is robust despite severe headwinds from the European debt crisis.
Travel is an inherently discretionary purchase, especially for regular retail customers. The stock has responded by rapidly falling when economic prospects look dim and rising when they appear brighter. At the beginning of the year the price was about $400 per share but has moved as high as $550 and then ricocheted back and forth to come close to the $520 Trefis price target.
During the last two months as some slightly improving unemployment numbers appeared and the Greek debt crisis appears to have some sort of resolution, the stock price has begun to inch higher. Over time, we would expect the price to continue to increase as the global economy expands and as it continues to take market share in the hotel bookings market.
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Profitable Hotel Bookings Power Growth
Priceline has focused its services on the hotel booking market rather than the more competitive and relatively commoditized airline booking market. The company has achieved gross margins of about 27% this year in its hotel segment compared to about 4% in airline bookings. However, we believe this margin will slowly decline to about 24% at the end of the forecast period.
Hotel booking margins are better because consumers are much pickier with hospitality bookings, usually seeking the right location, environment and amenities. In contrast, airline bookings are mainly focused on the two variables of time and price. Priceline can continue to take advantage of this profitable segment of the market to drive its growth in the future, especially in fast growing international markets.
In particular, margins on international hotel bookings through bookings.com have helped Priceline grow its markets share in Europe despite the economic slowdown. Priceline over the last few years has been steadily gaining market share in the European market and is looking to expand its presence in Asia and Latin America as well. These moves could help ensure that the bookings growth remain robust despite a volatile macro environment.
We have a $520 price estimate for Priceline, which we are reviewing in light of its recent earnings announcement.
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