Challenges And Opportunities For Priceline Group Inc (NASDAQ:PCLN)
Priceline Group Inc (NASDAQ:PCLN) prides itself as an online booking service provider with a large portfolio of offerings in the space. Online booking is a lucrative business, but the low barriers to entry mean that competition can always wipe out years of hard work building a business. Priceline’s offerings range from car rental to travel to hotel bookings. The question that begs for answer at this juncture is whether Priceline can book itself in for more growth going forward, amid intense competition.
Priceline’s strength areas
Strong cash position:
Priceline Group Inc (NASDAQ:PCLN) enjoys a solid cash position, ending the latest quarter (quarter 1 2015) with $4.64 billion in cash and equivalents. The strong cash position puts the company in a better position to battle competition in its space. The company can afford to make more strategic acquisitions or expand on existing partnerships to bolster is growth in new segments and geographies.
Priceline’s brands include Priceline.com, booking.com, rentalcars.com and agoda.com, just to mention some of them. A look at Priceline’s portfolio of services shows a company that is aggressively diversifying its revenue streams.
A diversified portfolio helps with spreading risks, enabling the company to offset adverse impact in one segment with gains in another segment, leading to more revenue stability.
Priceline’s diversification is multipronged, or at least, it takes two dimensions. The company is widening its portfolio of products and services as one way of diversifying revenue. Priceline is also expanding in and into more regions with China being one of its prime targets.
Priceline vying for larger pie in China:
Priceline Group Inc (NASDAQ:PCLN) is strengthening its relationship with Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP). The efforts are aimed at supporting its expansion in China.
The company is investing $250 million in Ctrip to widen its footprint in China, which is the fastest growing global travel market.
Priceline’s new investment in Ctrip is through convertible bonds. The company had previously invested in Ctrip’s bonds last summer, pouring $500 million into the business. If the two bonds are converted, Priceline’s equity stake in Ctrip is expected to rise to 10.5%. Priceline also has been granted the opportunity to purchase more Ctrip shares in the open market to raise its stake in the Chinese travel booking company to 15%.
In addition to dollar investment, Priceline and Ctrip are already in cross-brand promotions in a mutually beneficial arrangement. Priceline’s CEO, Darren Huston, revealed that they plan to enter more partnerships with Ctrip. The reason for more collaboration drive is that Priceline considers Ctrip to be a market leader in China, which makes the asset suitable for Priceline’s long-term view in the global travel market.
Growth opportunity in Europe:
Priceline has more room for growth in Europe’s hotel booking market with its booking.com platform. Booking.com already enjoys market leadership in Europe, but the European hotel market is poised for more growth, widening growth opportunities for booking.com in the region.
Competition in vacation rental space:
Priceline Group Inc (NASDAQ:PCLN) faces pressure in the vacation rental segment because of high competition there and low occupancy rates. The reason the vacation rental category is a high-competition place is that the market is highly fragmented and there are many players in it, some with vast experience. Competition against property managers, for instance, is complex, given that some of them have nearly 30 years in the vacation rental business. There are also alternative providers that are waging price wars with lower rates compared to what Priceline is able to offer.
Booking.com in urban apartment:
There have been reports that Priceline could move its booking.com platform to urban apartment listings. While that would be a positive growth move, competition in urban apartments is high and it could take time before the company can see any significant growth on that front.
Additionally, occupancy in the urban apartments market is low, at just 40%, compared to the hotel market that is north of 70%.
Airlines fighting third-party booking sites:
Airline carriers aren’t happy when their customers book their travel through other platforms other than their own websites. Some airlines have pulled selling fares on third-party booking sites and others are offering incentives for travelers to book directly with them. In some cases, like in the case of Lufthansa Group, airlines are charging extra for bookings made elsewhere.
The war against third-party travel services puts both the top and bottom lines of providers like Priceline Group Inc (NASDAQ:PCLN) at risk.
Growth slowdown due to size:
Priceline Group Inc (NASDAQ:PCLN)’s other undoing is its own big size. The company has built booking.com to the largest platform in its category in Europe. However, the size of booking.com means that it has little to no room for more big growth in the market.
High cash burn:
Priceline will likely be hard pressed to spend more money to defend its market share or grow the same amid intense competition, dipping into its cash balance. With competition in the online booking space growing intense, Priceline may find itself in need of more cash to fund more aggressive market campaigns, putting it in a vulnerable cash position.
First Quarter 2015 numbers
Priceline Group Inc (NASDAQ:PCLN) posted adjusted EPS of $8.12, exceeding the consensus estimate of $7.80 for the quarter. Revenue for the quarter came in at $1.84 billion, above the consensus estimate.
Second Quarter 2015 outlook
The management of Priceline expects second quarter 2015 EPS in the band of $10.95-$11.75. Analysts on the average expect EPS of $13.31 for the quarter.
Priceline Group Inc (NASDAQ:PCLN) plans to return $3 billion to shareholders through stock repurchase. The company raised debt to back its shareholder capital allocation plan, taking advantage of the low interest rates environment.
There is no doubt that Priceline Group Inc (NASDAQ:PCLN) has a lot of worries to chew over as it plots its growth. Issues that range from slow and challenging expansion in new categories to airlines moving to cut the cord present valid reasons to be worried about the future of Priceline. However, there is brilliant sunshine at the end of the dark tunnel. In other words, Priceline is already doing what a good company needs to do – expanding abroad and diversifying their portfolio. For that reason, the company looks well-positioned to survive the competition onslaught in its markets.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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