The long-term outlook for Priceline looks solid but there could be some short-term bumps in the journey. Sally White reports

In other industries the mega groups find it hard to keep up stratospheric growth, but time does not seem to slow the OTAs. The US’s OTA largest by sales and stock market value, Priceline, is lining up for the strongest quarter ‘in our company’s history’, according to CEO Darren Huston. This is the sort of stock of which investors dream - the shares have risen from $10 to a high of $1,395 over the last decade.  

But Priceline plays a complicated game with the stock market, one that can sometimes catch it out.

Having just surprised the market in early August with what were regarded as excellent Q2 figures, Priceline has guided analysts towards expectations for more. Revenue could be up to 8% higher in Q3, it says, gross profits up to 10% better (on a constant exchange rate that makes a climb of up to 26%).  Gross booking rises could be as much as 20% higher and in the international market bookings could jump by up to 23%.

Analysts received those numbers with scepticism – that Priceline won’t do better! The company has a history of putting out guidance that turns out to be much too conservative. Anyway, their view is, since Priceline’s shares are currently priced at a multiple to future earnings (around 22x) that is lower than Expedia (around 27x), TripAdvisor (around 34x) and Ctrip (around 48x) they look cheap!

International ambitions and smart acquisitions

Priceline has taken the international route to growth and it is well out of the stalled US domestic market. It has made has made smart acquisitions that have helped it broaden its market reach across Europe, North America, South America, the Asia-Pacific region, the Middle East and Africa. The international market’s revenue grew by 12% in Q2 this year compared to the same time in 2014. Domestic market’s revenue growth was only 0.7%.

The company has been looking for acquisitions. It has also been striking partnerships as the international OTA industry consolidates. This has helped Priceline expand its business to newer, fast growing territories. The company’s brand Booking.com grew its reach by 35% compared to a year ago to about 707,000 hotels. Its listings include leading international hotels like Marriott, Hilton Worldwide and Starwood Hotels. It also saw a 62% year-on-year growth in vacation rental properties. Its other brands - agoda.com, KAYAK, OpenTable and rentalcars.com - also saw strong quarterly growth in their businesses.

Time is taking its toll in that there is much more competition these days than at Priceline’s naissance

Q2 sales overall rose by 7.4% but there was a stunning rise of 85% in advertising revenue. However, time is taking its toll in that there is much more competition these days than at Priceline’s naissance. That means marketing and advertising spend budgets are now huge and spend has soared by 23% in Q2, knocking operating income back by 7.4%. Profits were announced at $517million, down 10% on the same time last year, but fine relatively for the industry.

So far, so good! Priceline is doing very well and it shares should benefit. 

Rising competition

Regularly beating market profit expectations, however, can be an unwise thing to do. Companies that consistently guide low, like Priceline, are conditioning analysts and investors to expect the company to beat forecasts. The market gets wise to this. The question then becomes, beating forecasts by how much? To really beat earnings forecasts, Priceline has to do so by a large margin, not by the usual amount that has become the ‘new normal’.

Of course, if the figures only meet or fail to meet expectations, the company will be considered to have missed analysts’ estimates by a large margin. According to StreetInsider.com, Priceline beats earnings estimates by an average of 5.3%.

Regularly beating market profit expectations can be an unwise thing to do

Not beating earning expectations by a large-enough margin is exactly what happened in earnings for Q1 this year. The company announced adjusted earnings per share of $8.12 on May 7 while analyst estimates were at $7.72, handily beating expectations. However, the stock fell that day by more than $50 a share or nearly 5%. The downtrend continued from there and Priceline shares lost an additional $100 a share ending in the period to June 29.

In spite of showing steady growth in revenue and earnings, the shares took ages to breach the high of $1,379 seen in March 2014. Since then they’ve fallen to just below $1,000 (in January and February 2015). Even after the good 2015 Q2 figures in early August, while they reached nearly $1,400 a share, they failed to hold this new peak.

The tactic is making stockbrokers’ salesmen pause. There is nothing wrong with Priceline’s long-term story. With a very successful business model as a global business there is still plenty of market for Priceline to capture. (It has a 10% stake in Chinese giant Ctrip and could make similar moves anywhere in the world).

But there are already a few short-term headwinds that are buffeting summer stock market trading. (More on the outlook for travel in a brand new EyeforTravel Half-Year Round-Up and Forecast: 2015). There is the strong dollar, trouble with Greece and other countries in the Eurozone, and a bubble bursting in the Chinese economy

Priceline continues to have an excellent outlook for the long-term. However, the shares could find the going a bit tough in the short term.