Thinking of buying Priceline Stock? What’s your Excuse?

Five years ago Priceline (PCLN) was a mere $50 stock, and now it’s threatening to break past $1000 level. Even more surprising is that this stock was trading around $1000 mark in 1999 soon after its IPO, and then dipped to as low as $10 in the following years. I usually don’t question markets wisdom, but this sort of price action clearly reflects deep rooted ignorance and stupidity among analysts, market gurus, traders, investors and money managers. It seems that almost every single one of us is short sighted, and the worst part is that the success of a listed company largely depends on us. Well, my rage is justified as we still haven’t developed an efficient marketplace, and this will become the reason for the death of the retail investor. Anyhow, you are not here to listen to my overflowing expressions of mindless thinking ;)

So, let’s look at the chart and see where Priceline could be headed next? I also went through detailed fundamental aspects and made comparisons to its competitors. You can have a slice of all that along with a few mindless notes after I cover the key technical observations in the first half of this analysis. (Click on the chart to enlarge)


Key Technical Observations on Priceline's Lifetime Chart

Technical Observations on Priceline’s Lifetime Chart

Priceline is testing its life time highs around $1000 and these highs coincide with upper band of the current trading channel, so it won't be surprising if the stock faces strong resistance in the region and heads back to channel support line. If this scenario plays out and a breakout above $1000 fails this time, then we could easily see the stock trading around $850 in 2-3 months from now. Apart from this, I see ample support near $760 level if we see a sharp knock-off in bullish sentiment anytime in the near term. The final line of support, which is the extended resistance line of the earlier trading channel, should be an ideal stop-loss on your existing longs. I don't like such stock chart patterns, even though we have exceptions that turn out to solid businesses in the longer term. But, Priceline isn't on that exception list due to many factors that I have discussed later in this post. I might not suggest buying this stock even if a fresh technical breakout occurs which most technical traders would actually rush to buy.

What Triggered Priceline’s Growth and what can curb it in Near Future?

Priceline has managed to post better than expected growth most of the times in the 4-5 years. One key reason has been some bit of stability across Europe, from where Priceline generates most of its revenues and the Fed’s easy monetary policy. Priceline’s future earnings will continue to remain at the mercy of consumer confidence in slowly recovering Europe.  The company will largely rely on its primary brands and we should not expect much in terms of inorganic growth, even development of major organic income streams is unlikely.  Well, Priceline is definitely expanding in international markets and its growth rate may not slow down much in the short term, but all that looks more than fully priced in. I also feel that it is enjoying unsustainable margins. This is in the light of the competition from the likes of TripAdvisor and Expedia which is only going to intensify. But there is a bigger risk at sight, and that is popping up of meta-search websites which work on larger databases. Sooner than later it will become an algorithm battle and that can even put brand loyalty at a huge risk. The pace at which such smaller Meta search sites are cropping up, traffic to Priceline’s websites can reduce dramatically over time. Moreover, acquiring paid search traffic will keep getting expensive as competition intensifies.

Identifying the Right Approach to Look at Priceline’s Valuations

Well, bullish investors may well ignore the discussed risks till their impact is visible through earnings, but they can’t justify the price to earnings ratio of more than 30 times. One straight answer to this that I hear too often is that look at Expedia and TripAdvisor, they are trading at much higher multiples. Well, I don’t like that excuse for buying into a stock which has rallied from $50 to $1000 in less than 5 years and face too many significant risks. These risks are out there in the open and people are aware, but no one is talking about them as the stock price is soaring. I guess no one from analyst fraternity wants to stand in front of a rising tide. Only problem is that they have no clue how far is it from the shoreline?

We must not forget that travel demand is a volatile space due to various known macro issues. Investors should be careful about the valuations while buying into this space. The talks of Fed cutting down on bond buying are already picking pace and in a few quarters we might see some action too. This could be a big blow to such stocks if consumers decide get back into hibernation mode. Travel plans are among the first things that are cancelled or postponed followed by retail spending when consumer confidence shifts to back gear.

The ugliest part about this stock is that it is trading more than 11 times its price to book, which is simply unacceptable if you are looking for slightest of value or comfort in a growth stock. It has not been a volatile stock lately as the stock price has risen gradually in a narrow channel, but that does not imply it won’t show you wild swings in near future. Its market cap is nearing $47 billion and many analysts are predicting a growth over 40% in earnings annually for next few years.
At the moment it is the fastest growth story in the travel space and is available at cheaper valuations than its peers. And if they can adapt with rising threats to their unique business model, the stock may find support on declines.

ProJabber’s Take

Now, after this long story, let me share my gut feel about what might happen and how should investors look at Priceline. You may still find many research reports suggesting that this stock is headed to $1200 or even higher, but these are the same guys who asked you to step aside around $100 and some may have done that even around $10. The fact is that no one has the wisdom to foresee future trends in a volatile industry. As I have stated earlier, technically there is no sign yet that this rally might top out near $1000, but in my view you are making a huge mistake if you are looking for such signs. This is one of those stocks from a volatile space that can correct 50% in a day on a bad quarterly earnings call or when some headline risk crops up and pose threat to sentimental shift from the consumers side. It has been a dream run so far and if you were able to capture even a slice of it, then its time you stepped aside and waited for the fireworks.

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8 comments:

  1. Excellent Work! I really like your thinking and find it refreshing

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  2. Crazy market! I hope I could find a stock to ride for next few years. Anything that can turn 10k into 100k will do.

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  3. My excuse is that its running hard. Soon it will be 2k and then 10k in another few years. Buy it now or you will miss the ride ;)

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  4. My excuse is that its running hard. Soon it will be 2k and then 10k in another few years. Buy it now or you will miss the ride ;)

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  5. Great Analysis! Regards Jacob Toussifar

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  6. I don't understand why are investors clinging to the hopes that Priceline (PCLN) will cross the psychological hump at $1000. I seriously think that it would be wise to get out of this stock and never look back. Don't buy it even if it collapses in coming months. It won't look cheap even after a 50% fall. My advise is usually similar for all hot stocks, but this one feels like volcanic lava.

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Don't keep interesting thoughts to yourself ;)