Despite near-term headwinds (terrorism and political uncertainty) in the travel industry, narrow moat-rated Priceline (PCLN) once again posted stellar results, supporting our view the company has long reached a critical mass platform, marketing, and technology advantage that are difficult for others to replicate. As a result of its strengthening advantages, the company’s third-quarter bookings growth accelerated to 25% from 19% growth reported last quarter (two-year stacked growth also accelerated to 32% from 25%). Additionally, room night growth also sped up to 29% from 24% last quarter (two-year stacked growth stable at 51%), well above Expedia’s 11% organic growth. Finally, property listings on booking.com reached 1.065 million, up 29% versus the prior year and versus Expedia’s 19% growth.
We plan to increase our existing 19% 2016 bookings growth forecast by a few percent, offset by lower advertising revenue, as the OpenTable brand ramps slower than expected leading to Priceline taking a $941 million noncash impairment charge this quarter (35% of the $2.6 billion purchase price). As a result, we don’t expect our $1,790 fair value estimate (which assumes low-double-digit annual topline growth for the next five years with operating margins nearing 40% in 2020 from 35% in 2015) to change much other than for the time value of money, still leaving shares of this high-quality company undervalued.
Priceline noted booking strength was across all its regions and has continued into the fourth quarter. This continues to contrast the slower growth many hotel operators are seeing, illustrating the global reach and power of the company’s aggregated platform, in our opinion. We also reiterate our view that industry competitive threats (Airbnb, Google, TripAdvisor’s Instant Book, and hotel direct bookings) are manageable, which continues to be supported by the company’s stable commission rates.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.