Priceline Group Inc (PCLN), the online travel agency that operates online reservation sites such as Priceline.com, Booking.com and Agoda.com, is on a hype. In the latest earnings release, Priceline stock smashed fourth-quarter forecasts, posting solid $2 billion in revenue, rising 8.7% year-over-year, and EPS of $12.63. This comes against a forecast of $1.96 billion for revenue and $11.80 for EPS.
But even more “smashing” was how investors responded, pushing the PCLN stock higher by 10%.
Unless you’ve owned Priceline stock since before this knockout report, you’re probably asking yourself if the ride is still worthwhile. You’ll want to know if you’ve missed the boat.
Unfortunately, the answer is not that simple, because the answer largely depends upon which sort of investor you are, i.e. a short-term stock trader or a long-term value investor.
Short Term, Priceline Stock Is Bullish
In the short term, Priceline stock bulls have all they need to push the stock higher. Not only did net income grow by 12% YoY, but gross bookings rose by 13%. Those increases were largely driven by a healthy growth in hotel room reservations.
On the timing front, this earnings beat couldn’t come at a better time.
Firstly, investors feared that the economic woes in China and the horrific terror attacks in Paris would hit the booking business.
Investors’ fears have now been relieved, and that allows investors to turn more confident.
Secondly, this earnings beat comes after the stock fell 24% from its peak and after a prolonged period of selling on Wall Street. That now leads many to believe that the broader stock market is cheap. And that leaves investors with a healthy appetite for growth stocks, just like Priceline Stock.
The two combined provide Priceline stock with just the right momentum to move higher in an attempt to break its November record at about $1,470.
Long-Term Priceline Stock Is Neutral
However, despite the optimistic wave that’s flooding Priceline stock, the story’s different over the long term. Over the long term, the stock is more or less neutral, rather than bullish, and perhaps even slightly bearish.
The reason? Because too much future growth is priced into PCLN stock, and that could disappoint. It’s difficult to believe Priceline’s revenue growth could continue at such a pace, considering its sheer size.
That leads to the question is it priced in?
Yes, it is.
The most useful tool I find in analyzing whether revenue growth is priced into a certain stock is the price-to-sales ratio. That allows you to gauge how many times revenue growth is priced in the stock. The higher the ratio, the more stretched the valuation and thus overly optimistic expectations. Put another way, the lower the ratio, the better.
As we can see below in the historical price-to-sales chart, the Priceline stock p/s ratio is closer to its upper band. That suggests much of Priceline’s revenue growth is already priced in.
Click to Enlarge
When too much good news — which hasn’t yet materialized — is priced in, it leaves much room for disappointment. And that’s a risk long-term, prudent investors shouldn’t take. Therefore, they should turn neutral on Priceline stock.
The Bottom Line for PCLN
The bottom line for PCLN Stock would then depend on your personal style — do you trade on momentum or invest for the long term?
Personally, as a long-term investor, I tend to find long-term risks materializing too soon.
When it comes to Priceline stock, I’d prefer to sit on the fence.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
