Over the past decade, as shown by the chart below, shares of the world’s largest online travel booking site, Priceline.com Inc (NASDAQ:PCLN), are up more than 3,000%. However, there are reasons why I believe the rally can continue.
Valuation
Despite trading at an all-time high, as shown by the chart below, Priceline.com Inc (NASDAQ:PCLN) is not trading close to historic highs on a forward PE-ratio basis. This means that, based on historical valuation, Priceline.com Inc (NASDAQ:PCLN) is not expensive.
PCLN Forward PE Ratio data by YCharts
Short Interest
Currently, short interest in Priceline.com Inc (NASDAQ:PCLN) stands at 2.72 million shares or 5.5% of the float. The high short interest indicates that, despite trading at all-time highs, many investors are still skeptical about Priceline.com Inc (NASDAQ:PCLN). If the stock continues to move higher, shorts will likely feel pressure to cover, which can lead to a short squeeze.
Cash
Currently, Priceline has more than $5 billion – or $103.51 per share – in cash. While the company has yet to say what it plans to do with the money, on the first quarter 2013 conference call CEO Jeffery Boyd said:
“And with respect to cash use, we do believe that there will be opportunities in the future to deploy our cash in our international cash in particular either through investing in the business and growing the business or in acquisitions and as you mentioned, I can’t get specific with that. But we do believe there are attractive businesses out there, we have been reasonably acquisitive as a company. … And with respect to other uses of cash as we said before, we have been buyers of our common stock and repurchase from time to time.”
Simply put, I would look for the use of cash going forward as a positive upcoming catalyst. Whether it be an acquisition or a return of cash to shareholders via an increased buyback or dividend, I believe any use of cash will be a positive. Priceline has a long track record of successful acquisitions including Kayak.com.
Debt-Financed Buyback
Just days ago, Priceline announced plans to buy back $1 billion of stock. The company is financing the transaction by issuing seven-year convertible notes. I would look for the buyback to put upward pressure on shares.
Improving Economic Outlook
Priceline is poised to benefit from the improving economic outlook as individuals will become more likely to travel. In particular, the rising stock market, which creates a wealth effect, should help the travel sector as a whole.
Risks
In my opinion, the biggest risk facing Priceline over the long term is competition. Both Expedia Inc (NASDAQ:EXPE)) and Orbitz Worldwide, Inc. (NYSE:OWW) have proven strong competitors. Currently, Priceline has gross profit margins of 34%. Over time, I think it is possible that margins are driven lower for Priceline because of competition. However, as Priceline CEO Boyd noted, Priceline has done a good job of maintaining its foothold on the market.
“… on the competition question, Expedia is a very strong company and they’ve been competing very aggressively against us for quite some time. Their agency program dates back to the acquisition of Venere, which is many years ago now. So, we think we’ve been doing a decent job in the phase of very robust competition from Expedia.”
As shown by the chart below, over the past three years, Priceline margins have increased while Expedia’s margins have actually narrowed. Of course, it must be noted that the reason why Priceline has significantly higher margins than Expedia is that Priceline focuses on the higher-margin hotel business where as Expedia focuses more on flights.
