Stock of the Week - Priceline.com (PCLN)

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Highlight Fundamentals
Priceline.com has three revenue streams including agency, merchant, and other advertising. Agency revenues ($1.8B)* are derived from travel related transactions where Priceline.com is not the merchant. This means they are selling another company’s travel services. As a result of making a sale, Priceline.com would receive an agent fee. All the credit card information is charged by that third party and not Priceline.com. This differs from the merchant revenue (1.1B)* whereby Priceline.com charges the customer’s credit card for travel services, packages, hotel services that Priceline determines the prices on. Other advertising revenues (39M)* make up a smaller portion or revenue and is just advertising they do on their site for other sites.

Priceline.com’s revenue stream is seasonal. If you guessed that most of the company’s revenue comes in the second and third quarters, you would have been correct. This is because although customers will book Spring and Summer flights and hotel reservations months prior, the revenue is not actually recognized until the service is provided. This means Spring and Summer when customers take their trips.

The company has a number of serious competitors in the travel space. This can be viewed as good news and bad. It is good that other companies see that there is potential for profit in the space, but what happens is competition can get intense. These competitors include other internet travel services such as Expedia, Hotels.com, and Orbitz. In addition, to online travel services, there are a number of traditional travel agencies, large online portals such as Google, Yahoo!, and Bing, and other such travel providers like airlines and hotel companies.

Unlike most internet companies, Priceline.com is actually profitable. They easily booked $681M in net profit as of the six months ended 6/30/13 versus a $534M for the same period in the prior year or a 28% increase. What is surprising is that Priceline.com has a P/E ratio of about 30 as of end of Aug. 2013. This may seem high, but if you look at TripAdvisor or Expedia  they are boasting P/E ratio of 48 and 47 respectively as of 8/30/13. 

Highlight Technicals
From a technical perspective, there were two buy opportunities in the past six months. But there may be more opportunities in the future. The stock first broke out in May and then broke out again in early July. These two points would have been great points to buy more of the stock or just to enter.

In order to manage risk, I would’ve set my stop (on the first entry) just below the channel at around 675 or played a two bar trail and put the stop just below 715 area.

As it stands now, the stock is holding on to the 20DMA quite well, but I would like to see it close above the 20DMA. If you enter now you can put your stop at 925. That would give you a low risk trade set up with a target at around 960. Alternatively, you can also wait till it gets over the 20DMA and then use that as a stop. 

While this may look like an expensive stock, it definitely has a low relative P/E ratio when compared to its competitors.