The travel industry is constantly changing and any news about new competition in the market can greatly affect the shares of current incumbents like Priceline Group Inc (NASDAQ:PCLN.) In the first month of this year PCLN lost 17% of its market capitalization. The beginning of 2016 proved to be a rough time for the online travel giant worth about $68 billion. To be fair, the overall stock market was also down in January so PCLN was dragged down as well. But besides the stock market pullback Priceline was also hit by two analyst downgrades on lower earnings expectations going forward. On January 5th investment company, Raymond James, downgraded Priceline from a “strong buy” to an “outperform,” and cited that competition from Airbnb and Expedia could eat into Priceline’s market share. Indeed, Airbnb has slowly made its way all around Europe. Later in the month investment bank, Goldman Sachs, also downgraded both Priceline and TripAdvisor, citing increased competition from Airbnb as well. The Goldman Sachs analyst, Heath Terry, who went to Columbia Business School, mentioned that Priceline is well positioned to expand its business in Asia, but it wouldn’t be able to grow fast enough there so he downgraded PCLN from a “buy” to a “neutral” rating.
However when Priceline released its better than expected financials in February, Wall Street had a change of heart, and the stock quickly bounced back up. Priceline shares have been steadily climbing since early February. It has gained back all of its January losses and has currently returned about 6% year to date.
Many investors consider Priceline to be a blue chip company that is relatively safe. It’s also 97% owned by institutional investors so there is a lot of smart money invested in Priceline at the moment. The only thing that might be considered a problem for income investors is that PCLN doesn’t pay a dividend. This could be a deal breaker for some, but fundamentally the company is still growing at a very generous rate. According to Thomson Reuters Stock Reports, the annual Earnings Per Share trend going forward for PCLN is that the company will make $69/share this year, $81/share in 2017, and then $93 in 2018. Since most analysts are expecting a 20% EPS growth for PCLN this year, the 27x price to earnings ratio makes sense given how stable the travel industry is most of the time. Even though the current P/E ratio is 27, the forward P/E ratio is a more modest 16x. With a current ratio of 2.5 times, the company’s balance sheet looks rather stable as well.
It’s easy to see how investors are torn about this stock. On one hand it has a decent earnings growth potential and could be more profitable in the future. But on the other hand the stock appears to be fully valued. In fact the 12 month target for the stock ranges from $1250 per share on the low side which is about 8% lower than its current market value, to $1470 on the high side, which is about 9% higher than the stock’s current price.
Airbnb may be a threat to Priceline, but the two companies ultimately serve different segments of the travel industry. Even though Airbnb has expanded to many countries and has disrupted traditional travel businesses, it will not replace the professional and predictable properties of the hotel business. The fact that hotel room prices have not fallen over the past 5 years is an indication that the market is large enough for both Airbnb and traditional hotels to operate. As oil continues to be cheap, more people should be willing to travel, and Priceline will be able to take advantage of that by making money on rental cars, hotels, and other accommodations. Although Airbnb and other companies may compete in this space, Priceline still appears to be the global leader in the travel industry.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.