Priceline has finally booked the Internet travel industry's ticket back to reality. The company's previous strong growth and lock on small European hotels convinced shareholders it was worth as much as $38-billion (U.S.) earlier this year. But Priceline's disappointing second-quarter results, unveiled on Tuesday, as well as dreadful results from rival Orbitz, have burst this bubble.
Out of context, Priceline's results look impressive enough. Overall revenue grew by a fifth compared to the same period last year. International bookings jumped 44 per cent in local currencies. But both are around half the growth registered in 2011's second quarter. Worse, Priceline's executives reckon international bookings will shrink to 23 per cent growth this quarter – slower, if calculated in dollars.
That's a big problem. Its overseas operations – especially the European hotels business it picked up with its 2005 acquisition of rival Bookings – don't just account for most of Priceline's profit. They also enjoy better margins than its U.S. travel business. So any slowdown in growth there will hit overall earnings hard. With both Priceline and Orbitz warning that European travel woes are worsening, this danger looks increasingly likely.
Shareholders were quick to notice, wiping 16 per cent off Priceline's stock price in Wednesday trading, and a quarter off Orbitz'. But they are still baking in great things from Priceline. After today's fall, the stock trades at 19 times estimated 2012 earnings, which is some 50 per cent higher than the market as a whole. That implies profit growing 10 percentage points faster per year than the S&P 500 Index for the next four years.
That's a tall order. Executives reckon overall earnings will grow 17 per cent next quarter. Perhaps growth in Asia will ignite another revenue booster. But there is stiff local competition. Moreover, its lofty profitability in Europe has already attracted rivals like Expedia. That will bring down prices and may require more capital expenditure, which at just $50-million last year was a mere 4 per cent of free cash flow.
The travel business is notorious for ruinous competition. So far Priceline has avoided it. But the prospect that rivals are after its business should bring Priceline's valuation back further toward Earth.