SAVE without Spirit: Priceline’s Compromise Engine

This was originally posted on 2/11/12

Depending on who you are, the most important factor in making your travel decisions is going to be one of the following: service, convenience, comfort, price, incentive, or some offshoot of one of these. For flights, most people probably agree that price is what matters most since in most situations it’s safe to say people aren’t going to be comfortable on an airplane no matter what.

But for hotels, things are a lot different. You have your 1%’ers, who don’t mind paying the extra $100-200 per night for the Four Seasons or another luxury hotel because their focus in on comfort and amenities. You’ve also got your… let’s call them 47%’ers, who don’t mind the accommodations and simply want the cheapest price around. And then you’ve got everyone else. Price matters, but enjoying a vacation or whatever it may be also matters, so price isn’t everything… but it’s a big thing, and still the main thing. These people are in luck.

Through their “Name Your Own Price” booking engine, Priceline.com (PCLN) has staked its claim as the TJX of travel retailers.

Now before you run out and buy the stock because it was mentioned in the same breath as TJX, let’s walk through how it works. As some of you probably know from experience, Priceline offers what they refer to as an “opaque” retail transaction, meaning the main details of the hotel, flight, or whatever accommodation it may be are given to the customer (e.g. price, proximity to desired location, room size/beds, specified amenities, etc.) but not all the details, including which travel supplier is behind the offer. In exchange for sacrificing some specifics, customers can get a discounted price for these accommodations. Customers simply provide the price they are willing to pay for their desired accommodations and Priceline will search through its inventory of discounted offers received by travel suppliers for any that hit that price point, or are closest to it. Once the customer sees the basics of the travel items being offered, if they choose to accept it they are then given all the details and the deal is finalized – no refunds or cancellations. Think of it as a blind date service for price-conscious travelers and desperate travel suppliers.

The bulk of the Name Your Own Price sales are hotels, so we will focus on that for now. Priceline is essentially a hotel’s surplus store, which they can fall back on if they end up “buying” too much inventory / not selling enough. Of course, Priceline is able to scoop these up at a discount, so the value-add slides down the supply chain and everybody’s happier thanks to the innovative feature, right?

I’d love to know what makes the opaque selling model such a Priceline-centric thing and why Expedia can’t do it, or why hotels don’t just throw these accommodations out into the GDS world for all travel agents to see after a certain amount of time. The obvious answer is that if customers know they can get a discount by waiting until the last minute or if they know others are paying less for the same accommodation, hotels will have all their price points pushed down as a result. But finding some way to justify their discounted nature couldn’t be too hard, could it? Loyalty programs? Anything?

If we know anything about Priceline, it’s that they’ve had one hell of a run in the 2000s, perhaps being the premiere growth stock outside of maybe Apple and Google. From as low as a pre-split $7 share price to a high of around $700, the stock has rocketed upwards and currently trades at about 25-27x TTM earnings. For a growth stock like PCLN, it’s probably fair to look for a multiple somewhere in line with their growth rate, which I’ll define simply as earnings per share growth year-over-year. Right now, 5.25B in revenue and analysts see 6.3B for 2013, which works out to [literally] 20.00%. Seems like analysts really like round numbers, or perhaps they’re a bit lazy. I’m sure it couldn’t possibly be the latter, however. Analysts also look for similar EPS growth for 2013, with forward earnings of $37.43 and 2012 looking to come in at $30.91. For reference, 2011 was $23.45, which is just over 30% growth, so that would be a slight slowdown being forecast by analysts. Nevertheless, at that growth it’s easy to see Priceline look attractive at 20x and possibly even its current 26x if the company’s long-term profile looks promising enough.

At the moment, like Workday I’m not confident I know the answer to this one, but if it’s fair to draw some parallels between Priceline’s model for travel suppliers and TJX’s with apparel retailers, the economic viability of the model has been proven over the long-haul and Priceline might have the advantage of accelerating air traffic to grow at 20% for the foreseeable future. Will continue to update this one as I see more. Again, the only thing I really do know is that I continue to love Amadeus for its ability to be the epic middleman it’s shaped up to be. Might have to revisit adding to that position before earnings.