A TECH STOCK up more than 50% year to- date that has analysts speculating on how soon it might touch the US$1,000 price target, and whose products and services just about everyone wants to use, yet has an extremely low market share and thus huge potential to grow. If you think I am talking about Apple Inc — whose shares are up 48% this year but pale in comparison with what is widely regarded as the momentum stock of the year — you’re wrong. I am referring to online travel auction site Priceline, whose stock is up 57% this year, having more than quadrupled in just 20 months since June 2010, when it was languishing at around US$175.
Priceline? Regular readers of this column might recall that just 18 months ago, I wrote about how William Shatner — better known as Captain James Kirk in the science fiction TV serial Star Trek — had stumbled upon a new frontier in tech investing when he took shares in Priceline in lieu of cash for the radio ads he had done for the then struggling Internet firm. It seemed like a nice enough barter deal at the time: pie in the sky for a few words mumbled over the airwaves.
The online travel site allows customers to bid the price they think appropriate for a range of travel services such as hotels, flights, car rentals and holidays. The once-struggling Canadian actor who had been forced to sleep in a beat-up car when he first arrived in Tinseltown more than four decades ago, looking for the odd acting job, had only reluctantly agreed to do the slots because his wife had nagged him. Maybe because of his own humble beginnings, the actor decided to help the then penniless founders of Priceline.
Thanks to Shatner’s radio ads, or perhaps the growing awareness of the potential of Internet travel or tech mania at the time, Priceline conducted its IPO and its shares went through the roof upon listing. Indeed, at the height of the tech boom, they touched a split-adjusted high of US$974. Unfortunately, not long after, the tech bubble burst and Priceline stock plunged to below US$1.50 per share.
At that point, several billionaire investors including Microsoft’s co-founder Paul Allen, Hong Kong property tycoon Li Ka-shing, Saudi Arabia’s Prince Al-Waleed bin Talal and Liberty Media’s owner John Malone bought stakes in Priceline either on the open market or as part of share placements the firm made to attract capital. All of them made money — between tens of millions and hundreds of millions of dollars. Over time, one by one, the billionaires sold down their stakes. Shatner himself sold most of his own stake and reportedly pocketed nearly US$600 million from the sale, representing a return of a several hundred times.
I wrote about Priceline in 2010 because so little was publicly known about Shatner’s investment at the time, and there was a lot of speculation. I remember emailing his publicist in Los Angeles and calling agencies in Hollywood for a lead, any lead, on how and where I could reach Shatner for a comment, but to no avail. Much to my chagrin, Shatner himself has since come out and talked about his investment in Priceline, although he has dismissed reports that he made billions as an exaggeration. How I wish he’d responded to my emails or spoken to me. Fortunately, I spent a few hours on the Bloomberg terminal, which helped me do a quick back-of-the-envelope calculation that put his total profits at close to US$600 million.
Truth be told, Shatner’s involvement wasn’t what got me trailing Priceline for weeks back then. What interested me initially was the spectacular run in its stock price, which doubled in just four months then. In early September 2010, Priceline was trading at around US$350 a share — up from US$175 just months earlier, or up sevenfold from its 2008 lows of around US$50 a share. Well, if you haven’t noticed, Priceline stock has actually doubled once again and over the past week, it has been trading at around a whopping US$740 a share. That’s a nearly 500-fold gain from the low point in the aftermath of the bursting of the Internet bubble in late 2000, a fourfold jump from June 2010 or a near 15-fold jump from the lows of 2008. Clearly, Priceline stock is on fire and its run has been so spectacular that even Apple’s fan boys would happily tip their hats to its momentum.
If you had put US$10,000 in Priceline stock in October 2008, you would have got a cool US$148,000 if you sold today. Or, the promise of a lot more if you are willing to hold it just a wee bit longer. Despite the seemingly lofty valuations currently, there are already several analysts who — wait for this — have a US$1,000 price target on Priceline stock. Yet, that isn’t as big a stretch as it seems. Unlike Apple, which has been crawling its way up to new records every other day this year, Priceline stock has actually been there, and done that. As mentioned earlier, its shares briefly touched an intra- day high of US$974 at the height of the dotcom bubble. Analysts expect Priceline’s revenues to grow to US$5.5 billion ($6.9 billion) this year and US$6.26 billion next year, from US$4.35 billion last year. And those numbers are still being revised — mostly upwards.
If you listen to Priceline’s proponents on CNBC, or some of the financial websites, you may hear them claim the company is growing its earnings so fast that it is highly unlikely the stock can come down to earth anytime soon. Net profits are likely to top US$1.65 billion this year (up 36% from US$1.2 billion last year) and surge to over US$2.1 billion in 2013. More people are travelling to places further afield and want to spend less money, and therefore, are more likely to shop around for the best travel deals on the Internet, rather then trying their luck with a travel agent. As the top online travel aggregator and the site that allows you to name your price and thus help you keep a grip on your travel budget, Priceline has advantages its global peers such as Expedia or Orbitz just can’t beat. (In the last quarter, Priceline grew revenues 36% compared with closest rival Expedia’s 6.7%.)
Why are the shares of an online travel portal soaring when US consumers are still reeling from a severe housing depression and global financial crisis, European consumers have just been hit by the sovereign debt crisis in the continent and Asian consumers are adjusting to a period of slower growth in China and India? Moreover, why would anyone want to buy any travel-related stock when the spectre of still-higher oil prices that often play havoc with travel patterns is looming, and economists are fretting about higher inflation?
For one thing, Priceline is no mere travel portal. At its core, it is a travel auction site. You decide what you want to pay and Priceline brings you the deals that fit your budget. Indeed, if travel bookings plunge because fewer people can afford to travel, Priceline may actually be able to get you better deals because there are higher hotel vacancies or more airline seats to be sold. In travel, business inventories are perishable items. It is better to fill the aircraft or the hotel room at half the list price than leave it vacant and earn nothing.
Its detractors say Priceline’s problem, like Apple’s, is the law of large numbers. It is easier to grow 50% to 60% annually from a low base, but the higher the base, the harder it becomes to maintain the old pace. Through Booking. com, Priceline has a more than 55% share of the European hotel market. Through Agoda. com, it has 17% or 18% of Asia-Pacific. Yet, hotels are just one part of its total business. There are flights, holidays and car rentals where Priceline’s penetration is so low that even 50% annual growth for several years won’t take it anywhere near saturation point. Moreover, travel markets in hot growth regions such as Asia are growing between 5% and 10% even in a more challenging environment like the current one.
What’s driving Priceline’s growth? How long can the stock continue to soar? For one, Priceline has been aggressively growing outside the US in markets such as Asia and Europe. In 2005, it bought Booking.com, which allowed it to dramatically expand its European footprint. It followed this up with the purchase of Agoda.com in 2007, which helped it scale up its business in Asia. International revenues now make up 66% of Priceline’s sales and analysts estimate sales in Asia and Europe are growing so fast that within three years, North America won’t account for much more than 20% of the total figure. International bookings grew 79% last year and analysts expect it to rise around 40% over the next three years, with Asia being the key driver with more than 50% growth and Latin America with around 65% annual growth from a lower base.
Clearly, the catalyst is the growth in global connectivity and boom in emerging markets. More Asians, Latin Americans, Arabs and Eastern Europeans are buying their first PC, tablet or smartphone and going online and shopping for the cheapest deals for holidays, hotels and flights that they can get. Online travel auctions is a product tailor-made for the burgeoning middle class in emerging markets who clearly don’t want to overpay but are excited about the great deals they can get online.
What of Priceline stock? Even at US$740, it is trading at just over 19.5 times this year’s earnings, which doesn’t look too high if you believe it can continue growing its earnings at more than 30% a year for the next three years. While even some of the Priceline bulls are concerned about the changing nature of the global travel business and the increasing competition from local players in Asia and Latin America, they don’t see Priceline being derailed anytime soon.
If Captain Kirk, or rather Shatner, had held on to his Priceline stock, it would be worth around US$2.5 billion now. That might not be enough to buy control of a media giant like Time Warner, The Walt Disney Co or even News Corp, but it would be enough to make him the richest actor/singer who ever lived — richer than U2’s frontman Bono, who would be worth about US$950 million if Facebook starts trading with a market capitalisation of US$100 billion.
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