Priceline Q1 disappoints. great opportunity ahead

On Tuesday The Priceline Group Reported Financial Results for 1st Quarter 2017, which were a mixed bag but ultimately lower than the market was expecting. The share closed down 4.5% on the day. Priceline is another one of those huge companies that most people have never heard of. The current market cap is just short of $90 billion, about the size of Ghana and Tanzania combined. That is a large company whose investors have high expectations, currently trading on a P/E of 42 but if all goes according to plan trades on a forward P/E of 21.

With those high expectations in mind here are the numbers. Revenues were up 12.6% YoY to $2.4 billion, on bookings of $20.7 billion up 28% and from that $456 million fell to the bottom line, an increase of 22%. That is very strong growth on what is not a small absolute number. Management are expecting booking numbers to be up between 16% - 22% for the next quarter. Having said that in terms of the global accommodation market, all the Priceline brands don't even account for 10% of it. Currently they have 1.2 million properties registered which gives them access to 25.5 million rooms, an increase of 36%. For the quarter they had 174 million rooms booked an increase of 27%. Going forward there should be growth on two fronts, the first is growing market share as more properties move online and the second is through growth in the travel industry itself. Their strong growth should continue for the foreseeable future.

The bulk of their money comes from the booking of rooms, even though you can also book flights and cars on their sites. Car rentals were up 15% for the quarter but the number of flights booked through their sites has been dropping for the last 2 years. I think on the flight side of things, given that most of us have rewards programs linked to particular airlines we go straight to those particular airlines instead of an aggregator like KAYAK.

The company's biggest expense is in advertising, where they spent $980 million for the quarter. Google will be on the receiving end of a sizeable chunk of it. Have you noticed where you type "Drakensberg accommodation" into Google and then for the next few weeks most of the ads you get served when browsing the internet is for accommodation in that area? While consumers are getting used to booking travel online, it is very important to be the fist site in mind when you want to book, hence the huge advertising budget. Once you have those customers you need to hold onto them through top class customer experience and ease of use site.

As millennials become the largest demographic globally, travel is a sector you want exposure to. Current trends have millennials prioritising experiences over "things". Added to that, as the global middle class grows so does travel numbers. Like most tech companies, Priceline is also cashflow positive, meaning they don't need large amounts of CAPEX (like we spoke about with Tesla yesterday) and debt to keep the growth going. It is a company we like as investors and customers. The current valuation is justified as long as the growth numbers stay strong and their customer satisfaction levels stay up, we will continue to monitor both.