I remember the days when Priceline shares dipped below $1 mark and Jay Leno was making fun of it on his show. Priceline (NASDAQ:PCLN) has since built a $33 billion market cap company on the business of providing discounted travel options online. By providing a site where travelers can search for hotels and flights that meet their criteria, it essentially replaces travel agents and has become the market leader in the space. The business has paid off well for investors who have gotten into the stock since the popping of the dot-com bubble, as PCLN is up over 800% over the last five years.
Priceline is one of the ten most popular services stocks among hedge funds (see the entire list here). Three different funds owned at least $500 million in the stock at the end of March. A pair of billionaire Tiger Cubs- Steve Mandel at Lone Pine Capital and Chase Coleman, currently running Tiger Global Management- owned 1.1 million and 800,000 shares, respectively. Each of these managers had dramatically increased the size of their position in the last quarter of 2011 (research what else Lone Pine has been buying and see Chase Coleman’s other stock picks). The third fund with a large position was PAR Capital, which was confident enough in PCLN that the stock made up over 20% of its 13F holdings.
For the fourth quarter in a row, Priceline beat Street earnings estimates in Q1 2012. In that quarter its revenue was up 28% over Q1 2011, and thanks to widening margins net income rose 74%. Growth was led by agency revenues, which had trailed merchant revenues as a source of sales in the first quarter of 2011 but now were the company’s primary source of business. Merchant revenues are defined by Priceline as being derived from sales in which Priceline acts as the “merchant of record” and charges the customer’s credit card as opposed to transactions on which it earns a travel commission.
Priceline’s 10-Q lists several potential competitive threats that investors should be wary of. Room Key, a joint venture by hotel companies such as Wyndham, Marriott, Choice Hotels, Hilton, and Hyatt, is an attempt to build a competing hotel search engine that keeps as much customer revenue within the hotel businesses as possible. Search engines such as Google (NASDAQ:GOOG) and Bing, as well as daily deal sites such as Groupon (NASDAQ:GRPN), have also begun to make moves into the hotel reservation business. Thus far Priceline has managed to hold off these challengers, though it is unclear how consumer behavior will change in the future.
While Priceline is the largest company in the industry, it faces competition from smaller peers. Expedia (NASDAQ:EXPE) has a $5.8 billion market cap and a number of travel site brands such as hotels.com and Hotwire to augment their main Expedia site. Expedia is priced more in line with a value investment; its trailing and forward P/E ratios are 15 and 14 respectively. Priceline is expected by both analysts and investors to generate higher growth in its business and so has a trailing P/E of 30 and a forward ratio of 17. Both of these stocks have soared so far in 2012, with Expedia’s 60% gain topping Priceline’s 40%. Since Priceline’s business depends on travel, it can also be compared to Marriott Vacations (NYSE:VAC) which manages and markets vacation ownership real estate. VAC is up 70% this year and, while unprofitable on a trailing basis, has a forward P/E of 19.
