We're now more than a dozen years removed from the stock market meltdown that heralded the end of dot-com era. A number of e-commerce stocks went on to disappear after the boom ended, though the companies that survived grew stronger over time. Companies like eBay (Nasdaq: EBAY) and Amazon.com (Nasdaq: AMZN) went on to prove their mettle, eventually upending the retail industry and scoring big gains for investors.
Yet it's Priceline.com (Nasdaq: PCLN) that has always stood out for me. Its business model not only revolutionized the travel industry, but also went on to post phenomenal profit margins and free cash flow.
But in some respects, Priceline has always been more of a trade than an investment. When the company is firing on all cylinders, its shares start to get pretty lushly valued. At that point, you're better off booking profits, because eventually, Priceline will deliver a weak quarter and its shares will temporarily move into the doghouse.
And that's the time to buy.
I first talked about this phenomenon roughly two years ago on our sister site, Investinganswers.com.
Shares went on to triple from that entry point.
Investors were treated to another buying opportunity at the end of 2011 when shares again fell out of bed. As I discussed in this article, the short-term pullback obscured a very healthy long-term picture.
Well, it's happened again. On its path to ever-higher sales and profits, Priceline has delivered another so-so quarter, and fell more than $100 on Wednesday, August 8.
Time to buy? You bet.
To see if shares are a bargain, you have to look at the reasons behind the fresh plunge in this stock. It all comes down to one word: Europe. The ever-weakening European economy is leading consumers in that region to curtail all non-essential spending. Priceline derives more than half of its revenue in Europe and there's simply no way that this travel company could avoid taking a hit.
To be sure, European travel will rebound and likely continue to post solid growth for Priceline as the ongoing migration to online travel bookings is an at an earlier stage of development in Europe than it is in the United States. Yet any European rebound is likely a number of quarters away.
You can understand the impact from Europe by looking at Priceline's Q3 guidance. Prior to the release of quarterly results, analysts had expected Priceline to earn around $12.75 a share. Now, that figure is likely to be around $11.60 -- using the midpoint of the company's guided range. And whereas Priceline had been expected to earn around $31 a share this year and around $39 a share in 2013, those forecasts have come down around 10%.
The long view
As I started to dig into the issues behind Priceline's current woes, I came across a headline on another financial website that said "Avoid Priceline Till European Recovery In Sight." That is precisely the wrong way to look at things. Recall that shares plunged in the summer of 2010 because volcanic activity in Iceland was dampening air travel in Europe. Investors were reacting to an event that seemingly spelled trouble for a long time to come.
In this instance, you need to again take the long view. European consumers are feeling quite stressed, but it's vital to remember that in the region's largest economies -- Germany, France and the U.K. -- there is a tremendous culture of travel. It's not that these European consumers can't afford to travel, it's just that they are opting to conserve cash right now. If you wait for European consumer sentiment to rebound, as that article suggested, then you will likely have missed the upside this stock now represents.
History has shown that shares of Priceline tend to rebound fairly quickly and don't stay in the doghouse for very long.
So what are the analysts that follow Priceline saying, now that shares trade for $570?
- Deutsche Bank dropped its price target from $713 to $675, noting that management's "guidance for a deteriorating travel environment appears overly conservative vs commentary elsewhere in travel and online markets."
- Credit Suisse dropped its price target from $818 to $727 (representing 27% upside), suggesting that "Priceline is still an open-ended growth story as its share of hotel room nights in Europe remains in the mid-to-high single digits."
- Citigroup dropped its price target from $850 to $740, but cites several positives for the stock, including the fact that "PCLN continues to gain market share in International Bookings; 2) PCLN's Hotel network continues to increase at rapid rates -- inventory is a key leading indicator of Bookings; and 3) Hotel Room Nights growth implies market share gains in both U.S. & ROW" (Rest of World).
- Goldman Sachs dropped its price target from $760 to $680, noting that in light of the company's long-term fundamentals, shares deserve to trade for 15 times 2013 EBITDA targets.
Risks to Consider: U.S. travel has also weakened a bit, but if the U.S. economy falls into recession in 2013, then it will take longer for Priceline's growth metrics to resume.
Action to Take --> The above-noted price target reductions are logical in the face of what's happening in Europe in 2012. Yet if history is any guide, it's those prior higher price targets that will be back in place when European consumers are again looking to travel.
In the near-term, look for a moderate snapback in shares over the coming weeks and months as investors start to re-visit this newly-cheap stock. Look for a move into the $600 to $625 range. Yet if you've got a multi-year time horizon, then you may see this stock punch past its 52-week high of $775. That would be a 38% gain from the recent closing price.
As the chart noted earlier in this piece suggests, shares of Priceline go on to make new all-time highs after each pullback. And the current pullback should be no exception.