09.19.13 3:30 PM ET
Priceline Stock Breaks Through $1,000 Barrier
It appears Priceline has negotiated itself all the way to a major upgrade.
The name-your-price travel site, perhaps most famous for its “Priceline Negotiator” commercials featuring William Shatner (and more recently Big Bang Theory’s Kaley Cuoco), set a record on Wednesday, becoming the first component of the Standard & Poor’s 500 to trade for more than $1,000. (After trading for as high as $1,001, it actually closed at $995.09).
Now, stock-market milestones are obviously symbolic and generally meaningless. The difference between $999 and $1,000, after all, is a single dollar, or about one tenth of one percent. Still, it’s a good occasion to take a look at Priceline’s remarkable ride. Even though it’s a mature company, Priceline, founded in 1998, is 15 years old, which translates to about 90 in internet years. And yet it is growing like a startup. In the most recent quarter, it reported gross profit of $1.38 billion, a 37.8 percent increase from the previous year’s quarters. Total bookings were $10.1 billion, which was an increase of 38 percent from the year before.
First, all jokes about Shatner aside, the commercials are quite effective. They convey clearly, in a cheeky, campy kind of way, what the site is all about— getting the lowest price possible. Iconic, catchy commercials are increasingly important, as Google Knowledge Graph (as well as Google’s own travel products) has had a major impact on the display and effectiveness of search for travel sites.
Priceline also has a good reputation with customers. According to J.D. Power and Associates 2012 Independent Travel Website Satisfaction Report, the number one and three best travel websites in terms of customer satisfaction were Booking.com and Priceline.com, respectively, both of which are owned by Priceline Group. In the online market, reputation is everything, especially when there are a variety of options with sometimes wildly divergent prices and people are being asked to make three- and four-figure transactions. In the travel industry, with the high costs and stress involved, sites with a reputation for customer satisfaction are worth searching and paying, for.
What’s more, Priceline, and similar travel sites like Orbitz, Expedia, and Hotwire have strong business models. They don’t make or sell physical products which means they don’t have huge overhead in terms of manufacturing, transport, or storage. (Amazon.com struggles to make big profits in part because it is always spending billions of dollars on warehouses, logistics, and inventory.) Plane tickets and hotel reservations are essentially digital goods. Priceline also has a two-pronged business model. It makes commissions off traditional bookings, like old-school travel agents. But the negotiating feature allows it to profit by pocketing the difference between what the person bids and the price the hotel chain is willing to accept. And what differentiated Priceline early on from its competition was its aggressive pursuit of being a one-stop-shop for airfare, hotels, and rental cars globally.
Meanwhile, the travel business is bouncing back. And air travel is getting much more expensive. That means there’s more money coursing through the aviation business generally, and hence more commissions being thrown off through the purchase of airplane tickets.
But the biggest chunk of Priceline’s revenue is hotels, a business in which the company’s margins are a reported 23 percent. As the economy recovers and tourism has begun taking off again (see Chicago hotel boom) Priceline is benefitting. And while the air travel market is extremely competitive with lower margins, having a strong footing there allows Priceline to lasso those customers into its more profitable services like hotels.
Priceline has also executed a successful merger with popular and cheap air travel site Kayak (one of the major drivers of its huge year-over-year growth numbers). In addition Priceline’s strength has come without much in the way of digital advertising revenues.
The sky-high value for Priceline is also part of a recent trend by companies chasing ever higher stock prices. Historically, when a company’s stock hit say, $100 or $200, the company would "split" the stock on a two for one basis. So if you own 100 shares worth $100 each, the next day you own 200 shares worth $50 each. The idea is psychological; investors are turned off and intimidated by high prices. And people typically buy shares in lots of 100 at a time. So if a stock is at $100 you would have to commit $10,000 to buy 100 shares. If it is at 50 you only have to commit $5,000.
For a long time, it had been seen as best practice in the investing worlds for companies to split shares as they rise, and then split them again, largely for marketing reasons. But there’s a trend in the other direction. Warren Buffett famously never split the shares of Berkshire Hathaway, which now trades at about $175,000 per share. And tech giants like Google ($900) and Apple ($473) are modern examples of companies that don't split shares even as they soar. It’s actually something of a matter of pride. Truly hot, enduring companies don’t have to split their stock to make them more appealing to individual investors.
Now how’s that for a deal!