As always, you can read this on my blog, or read it on Reddit. I have helpful charts and images that I don't have on here.
Business Overview
Priceline's Mission is to help people experience the world. They seek to achieve their mission by providing consumers, travel service providers, and restaurants with worldwide leadership in online reservation and related services.
Priceline at their core is an online travel agency. What that means is that they provide consumers with these OTA (Online Travel Agency) websites such as Priceline.com, Booking.com and help people book flights, cars, accommodations, and cruises. Most of these websites have a widget where you set the range and the location to book your experience. Recently, Priceline acquired OpenTable which allows consumers to set reservations for restaurants.
Priceline is a pretty simple business. People book things online through either Priceline or any other brands that they own and they make a commission on those transactions.
Priceline brands: Kayak.com, Priceline.com, Rentalcars.com, Agoda.com, Booking.com, Opentable.com, Momondo.com
How does Priceline Make Money?
Priceline makes money from:
Commissions from facilitating reservations of accommodations, rental cars, cruises, etc. Transactions gross profit on customer transaction fees. Ad revenue from Kayak to sending to other websites. Ad placements on Kayak. Open table Restaurant booking fees paid by restaurants and subscription fees paid by restaurants. Damage excess waiver fees, insurance fees.
However, in their annual report, Priceline splits out their revenue into 3 different categories.
Agency revenues
These agency revenue doesn't include travel-related transactions. Mainly these are travel reservation commissions, GDS (Global Distribution System) booking fees, and travel insurance fees.
Merchant revenues
These are derived from services where Priceline facilitate payments for the travel services.
- Transaction net revenues ($ charged to the customer - $ charged to Priceline by travel service providers).
- Travel reservation commissions through Agoda.com, Priceline.com, and Booking.com. Reservation provided through car service.
- Transaction revenues through "Name Your Own Price" reservations charged to a customer. (Discontinued Sep 2017)
- Ancillary fees which are travel insurance fees, and certain GDS reservation booking fees.
- Customer processing fees charged with priceline.com & Agoda.com
- Advertising and Other Revenues
These revenues are mainly compromised primary from:
- Revenues earned by KAYAK when KAYAK directs people to OTC's (Online Travel Companies) and
- web/mobile ad placements on Kayak.com.
- Revenue earned by OpenTable's reservation fees and OpenTable's subscription fee paid by restaurants.
- Revenue earned by ad placements on priceline.com
- Revenue earned by Booking.com's BookingSuite branded accommodation marketing and business analytics services
- Agency Revenue + Merchant Revenue + Ad & Other Revenue = Total Revenue
Priceline's Competitive Advantage?
Priceline's competitive advantages are:
- Ease of use booking websites
- Multiple partnerships with Online Travel Companies
- Network Effect
- Multiple Website Brands
Ease of use is important because as it gets easier book flights or stays through one of Priceline.com brands, the less likely the customer will leave. Their frictionless purchase is super valuable since they make money on commissions per booking.
Since Priceline doesn't really own any of the "content" they are a middleman between the buyer and the provider. Since they don't own any content of their own, they do rely on the strong partnership with Airlines, Hotels, and car rental providers. If any of these content providers leave Priceline's platform, the less valuable Priceline will become. This transitions well into their competitive advantage.
Another one of Priceline's advantage is their network effect. As more and more consumers go to Priceline's brands, the content providers have to get on the platform to have their inventory booked. As more and more customers and OTC's join, the stronger the platform becomes. For the most part, travelers are either looking for the cheapest flight or the end destination. There are some differences with airlines, hotels, and restaurants, but for the most part in this travel industry, people are looking for the fastest or the cheapest method and content is not as important as other industries such as entertainment.
Lastly, their well-known brands such as OpenTable, Agoda, Priceline, Kayak and Booking.com is their big advantage over their competitors. These brands are well known, trustworthy and it is easy to screen and book flights and stays.
Priceline's Competitors:
Priceline competes with Expedia who owns brands such as: Expedia.com, Hotwire.com, Orbitz, Trivago, Hotels.com.
Google has their own flight booking service, but it is still not as easy to use and it doesn't look like there are not as many options as Priceline's suite of brands.
Also, there are a lot of different hostels and startups entering into the space to be disruptors such as Airbnb, HomeAway, and Uber. However, not everyone is going to be wanting to sleep on someone else's sofa or bed. I think in the future, as millennials get older, they would still like have their own private bathroom and room service provided by the hotels.
Priceline's Business & Growth Strategy?
Based on Priceline's 2016 annual report, they have 4 strategies they are focused on.
- Providing the best consumer experience.
- Partnering with travel service providers and restaurants.
- Maintaining multiple, independently managed brands.
- Investing in profitable and sustainable growth.
All of these match with our thoughts on what Priceline's competitive advantages are. They are also adding a bonus where they will keep on investing and expanding into areas where they can make more money and grow shareholder's value.
"We believe that travel service providers and restaurants benefit from participating in our services by increasing their distribution channels, demand and inventory utilization in an efficient and cost-effective manner. Travel service providers and restaurants benefit from our well-known brands and online marketing efforts, expertise in offering an excellent consumer experience through our websites and mobile apps and ability to offer their inventory in markets and to consumers that the travel service provider or restaurant may be unable or unlikely to reach."
Expand their partnerships with content providers.
"We also may pursue strategic transactions. For example, in 2013 we entered the meta-search business when we acquired KAYAK and in 2014 we entered the online restaurant reservation market when we acquired OpenTable. We regularly evaluate, and may pursue and consummate, other potential strategic acquisitions, partnerships, joint ventures or investments, whether to expand our businesses into complementary areas, expand our current businesses, acquire innovative technology or for other reasons. For example, we have a commercial relationship with, and have made significant financial investments in, Ctrip, a leading OTC operating primarily in China."
Expand and grow their portfolio of brands, which allows customers to experience the world.
Risks?
Priceline's risks mainly have to do with their partnerships. If any of the partners decide to go solo and remove themselves off Priceline's platform, Priceline will suffer.
Also, it looks like from their last quarterly report that their ad spending is getting more and more inefficient. So, Priceline's margins maybe shrink overtime if they don't fix that problem.
I think a bigger risk is the startups that may disrupt the rental car market and the airline flight market. Uber is building out their own force of airplanes for travel, and Elon is potentially building superfast trains that can go from LA to NY in 2 hours.
Priceline's Revenue, Cash & Debt?
In the last 10 years, Priceline has been growing their revenue 22.5% annually. In the last 5 years, Priceline has been growing their revenue 15.4% annually.
As of Q3, 2017, Priceline had $18.36 Billion in cash & cash equivalents. As of Q3, 2017, Priceline had $8.73 Billion in debt.
Priceline has a net cash balance of $9.64 Billion. This is a very strong balance sheet. If Priceline has a couple of bad years, they can last 2 - 3 years without making money and not go bankrupt.
Priceline's Operating Expenses & Income / Margins / Net Income?
Priceline separates their operating expenses into 7 categories.
Advertising, Sales & Marketing, Personnel, General and Administrative, Information Technology, Depreciation, and Goodwill.
Operating expense as a % of gross is decreasing except 1 category. Advertising is the only one that is getting more and more expensive every year. I mentioned previously that this is the area that we should look at since it is the only one that is increasing and during the 2017 Q3 conference call, the management team has mentioned this issue as well.
Priceline is at an advertising war with Tripadvisor and Expedia. Their expenses, margins, and management's responses during their last quarterly call illustrate their pains.
Priceline's Free Cash Flow & Capital Expenditure?
In the last 10 years, Priceline has been growing their free cash flow at 37% annually. However, in the last 5 years, they have been growing FCF at 14% annually.
Not only they have been growing their free cash flow, their margin's been growing at a rapid pace. In 2007, their FCF to Rev margin was only 10%, but in 10 years they have tripled that! For every dollar of revenue that comes in, .31 goes to their cash flow.
If we compare this number to Expedia's FCF to Revenue margin, Priceline's margins are significantly greater than Expedia's FCF/Revenue margins. By the end of 2016, Expedia FCF margins were 9% while Priceline's margins were 31%. This shows that the management team at Priceline is better and/or Priceline's moat is much much wider and deeper.
Priceline's Other Important Metrics?
Since Priceline's business modal is based on the number of rooms, cars, and flights booked, let's look at those metrics.
556.6M room nights were booked, 66.6M car days were booked, 7.3M airline tickets were booked through Priceline's brands.
One thing concerning when looking at this is the decreasing of the number of Airline Tickets booked through Priceline. They did mention that the reason for that was the discontinuation of Name Your Own Price ticket reservation system.
Priceline's Potential Return & Margin of Safety?
I believe with Priceline's brands, management team and the growth in global travel will allow Priceline to be a leader in this OTA/experience booking market going forward. They currently have some missteps with advertising costs, but in the long run, they are investing to strengthen their brand so travelers can book straight from their website instead of paying for clicks on Google or other search platforms to direct them into Priceline.
If we use 13% as our free cash flow growth rate and 18x multiple, In 10 years Priceline's Free Cash flow will be around $14.6 Billion and the market cap of Priceline will be $262.8 Billion. If we add in all the cash flow we have received in those 10 years I see a return of 18.5% annually if nothing goes wrong. If we give a margin of safety of 50%, I see the company returns at around 11% annually.
Sum of 10 years of cash flow + Future cash flow in year 10 * 18 multiple = $409 Billion
50% margin of safety = $205 Billion
Margin of Safety Price: What the price need to be today for me to gain 10% annually if we divide the estimated 10-year value of the company by 1/2.
My Purchase Price/Share = $1,651.47
Margin of Safety Price/Share = $1600
TL;DR
Priceline's advertising issues will not be a problem in 10 years down the road and will be able to keep their fat margins (30%+ Operating Margin) while entering into new experience booking opportunities.
Strong balance sheet, growing free cash flow, and the current price is great for a great business.
Disclosure: I own shares of Priceline.
Submitted November 14, 2017 at 01:12AM by stock_market_noob http://ift.tt/2icBRX6
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