Priceline.com (NASDAQ: PCLN) and its pitchman William Shatner made the dream of naming your own price for a hotel room or plane ticket a reality instead of just a consumer pipe dream. Priceline is a true success tale that combines a new price paradigm, innovative technology and effective spokesperson marketing. And the run has been good for PCLN stock as a result.
The Priceline.com success story has really shifted into overdrive this year, both on the earnings front and in terms of PCLN’s price performance. Priceline stock has surged some +75% over the past three months, and over the last 52 weeks PCLN shares have provided investors with a +106% return. Those numbers are indeed impressive, but not nearly as impressive as the +1,382% gain in the stock over the past five years. Needless to say, if you had the foresight to book Priceline.com into your portfolio back in 2005, you probably now have the cash to travel first class.
So, with PCLN shares up so much of late, investors rightly wonder if the stock can continue flying high. Here are a few pros and cons supporting both sides of the Priceline.com debate.
Reasons to Buy Priceline Stock
Resonating value pitch. Perhaps the greatest reason why both consumers and investors have embraced Priceline.com is its basic message of providing value. The ability to name your own price for travel arrangements really resonates with both cash-strapped consumers looking for value, and with corporate travelers looking to minimize costs.
Delivering earnings. The latest spike in PCLN shares was prompted by the company’s Aug. 3 second-quarter earnings report that featured a +71% year-over-year jump in net income. Priceline.com said it earned $115 million, or $2.26 per share, in Q2. Excluding one-time items, the company’s adjusted income totaled $158.2 million or $3.09 per share, in the latest period. Revenue in the quarter rose +27% to $767.4 million from $603.7 million in the same quarter a year ago. Wall Street was expecting earnings per share of just $2.64 on revenue of $733 million excluding the one-time items. With an earnings blowout this big, it’s no wonder the stock surged some +23% the day after the announcement.
The international factor. While Priceline.com’s revenue and earnings beat was impressive, the way it beat earnings was perhaps even more impressive. The company saw a +63% rise in international operations from the prior year’s quarter, with strong growth in global hotel reservations. International travel bookings increased +59%, while domestic bookings were up +20%. The prospect of greater international travel will be key to Priceline.com’s continued success, as continued overseas travel — particularly to Europe — will likely keep fueling the company’s earnings and pushing PCLN’s shares higher.
Reasons to Sell Priceline Stock
Too far, too fast. Perhaps the biggest argument against a continuation of PCLN’s stellar recent price performance is the fact that the stock has run up so far, so fast. The huge buying in the shares since the Aug. 3 earnings release has caused a +36% rise in the stock in just over a month, and that kind of run is historically unsustainable.
Consumer spending remains weak. Despite last quarter’s willingness on the part of consumers to go for the value booking at Priceline.com, the fact is that consumer spending at large continues to struggle. Recent consumer spending data shows that consumers aren’t ready yet to unleash their wallets and that could take a bite out of travel. If we see a contraction in GDP combined with an increase in unemployment, or even a double-dip recession scenario, it could put the brakes on discretionary spending—and on Priceline.com’s bookings.
Compared to what? To be certain, the company’s second-quarter was indeed robust. But the year-over-year comparisons are somewhat tainted by the virtual trough we saw in travel last year. In fact, 2009 was one of the toughest years for the industry, so by comparison this quarter’s numbers might look better than they would otherwise.
The Google factor. Potential competition from Google (NASDAQ: GOOG), which now awaits approval for its pending acquisition of airline information provider ITA Software, could be in the works. The Justice Department is closely monitoring the proceedings, but an OK and some shrewd business moves by Google could easily put it head-to-head with PCLN and other online travel providers in the very near future.
PCLN Verdict: Still a Buy
Most analysts who follow Priceline.com think the company’s earnings will grow and that its stock price will continue appreciating, and for many of the pros cited here. In fact, just one day after its earnings report the stock was upgraded to “buy” at Stifel Nicolaus. While contrarians think the stock has had its day, I suspect that the run in Priceline.com shares will continue, though it’s hard to see the stock jumping another 75% in the next three months.
However, unless the economy grinds to a serious halt in over the next several months, there is likely still money to be made by booking PCLN into your portfolio.
As of this writing, Jim Woods did not own a position in any of the stocks named here.
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