Priceline vs. Expedia: Is it Now the Laggard’s Turn?
This 10-year price chart comparing shares of Expedia (EXPE) and Priceline (PCLN) essentially shows one of the great growth stocks of the past decade, Priceline, and a flat liner, with Expedia sliding sideways.
The gap between Priceline’s market cap and Expedia's is almost $20 billion.
That’s mostly because the market accords Priceline a much higher PE, due to its astonishing growth, which has just recently made it the largest online travel agent, eclipsing Expedia in revenues.
Still, on a snapshot basis, the two hotel booking giants are in the same ballpark. Priceline’s third-quarter revenue was $1.45 billion vs $1.14 billion for Expedia. Net income was $469.5 million, or $9.17 a diluted share at Priceline, vs. $209.5 million, or 75 cents a diluted share at Expedia.
So, if Expedia could ramp up its growth and somehow Priceline’s growth slowed, Expedia shares today would by comparison be undervalued. Roger King, a transportation analyst at CreditSights and one of the smartest travel mavens around, has been making just that point. After the second results were out, King noted that Expedia’s Hotels.com had converted to a more user-friendly technology platform and that hotel bookings at Expedia were “reaching priceline.com-like growth rates.”
Both companies also sell airline seats and rental car reservations, but the action is in hotels. And the growth there is outside the U.S., where the highly-fragmented hotel industry and bewildered international travelers both badly need a middleman. The companies try to lure travelers directly to their web sites, but they continue to spend hundreds of millions of dollars combined each quarter on search terms like “Hong Kong hotel.” Yay for Google (GOOG).
Priceline’s booking are roughly 80% outside the U.S. Expedia is only getting about 40% of its booking from foreign markets, but its international sales are now growing rapidly and that’s where King sees a chance that Expedia will narrow the valuation between itself and Priceline, over time.
Some of that narrowing will likely be driven by a further downward movement in Priceline’s PE. The highflyer’s shares are still trading near their all-time high, but recent strong growth in profits haven’t lifted the shares.
The two companies aren’t just competing for investor favor, of course. And growth and profit margins at some point will me moderated as there are fewer hotels around the world to sign up. Priceline’s spending on online advertising, which is a key measure of the business’s productivity, was $701.3 million for the first nine months of 2011, or 20.8% of revenue. A year earlier, online ad spending was just 17.8% of revenue, or $418.4 million. So growth is becoming somewhat more expensive. Leverage elsewhere in the Priceline business model means profits have grown faster than revenue, which is lovely, of course. Still, King sees Priceline shares as overvalued.
But in the near term, Expedia, catching up to Priceline’s growth rates by expanding its international hotel business, could lift its shares off that depressing flat line. “EXPE offers better value as its increasing exposure to international markets diversifies it away from slower growing domestic markets which should result in a higher valuation,” King wrote earlier this week.