Priceline Pullback a Buying Opportunity

Similar to Expedia’s near-term investments, we view

We see three takeaways from narrow-moat Priceline’s third quarter. First, Priceline is shifting ad spend to brand (TV) from performance (search and meta) to drive direct bookings. This shift supports long-term growth, but pressures near-term results, as TV spend takes time to drive awareness relative to performance channels. This shift is also a negative for TripAdvisor, as Priceline may spend less into these channels until ROI stabilizes.

Second, Priceline is lifting IT and hiring expenses to drive user experience and growth in vacation rentals. The company commented that vacation rentals are lower profit than hotels because they need more customer service and IT support. So, while this segment is growing above the company consolidated average (not quantified), it comes with lower margins. Increased spend in alternative accommodations is a negative read-through for narrow-moat companies Expedia and TripAdvisor.

Third, the demand environment seems healthy for Priceline. This is evident in 18% third-quarter bookings growth versus 11%-16% guidance and our estimate of 15%, leading to a slight lift of our 14% and 12% sales and EPS forecast for 2017. Still we don’t expect much change to our 13% average annual sales growth through 2021, as we reduce our 2018 revenue growth to around 13% from 16% due to lower near-term performance spend, mitigated by a higher 2019-2021 sales forecast as TV spend slowly drives awareness. That said, we plan to lift our brand ad, tech, and hiring costs the next few years, resulting in 100-150 basis points of lower average operating margin through 2021, which will be offset by the time value of money.

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