It's not often that the Priceline Group misses earnings or takes a beating on Wall Street - the stock is up 537.92% over the past five years, after all. So the surprise soft outlook for the next quarter sent shares tumbling 8% this week, marking another notch on a year-long downturn in the stock.
In trading today, the price has since recovered slightly, posting a few dollars increase so far in today's trading - not nearly enough to scrape back what was lost early this week. So why did investors react so aggressively to the Q3 earnings call?
Europe, Ebola and long-term investments
Priceline (PCLN) did just fine on the earnings front, beating analyst expectations for revenue with $13.8 billion - a healthy 28% increase over last year. Overall profit this quarter was $3.2 billion - also posting a solid increase, jumping 28% year-over-year. Net income (GAAP) was $20.03 per share, compared to $15.72 last year at this time.
The main reason for the sell-off was the softer guidance given by executives during the call.
Europe was of particular concern, as the economy there still faces stiff headwinds as it continues to teeter on the brink of recession. Without a strong performance in Europe, the company as a whole will struggle to regain its footing, as Priceline CFO Daniel Finnegan emphasized in the call, saying "we are increasingly concerned about economic conditions in general, and in our key European market in particular."
In addition, the emergence of Ebola as a global threat has trickled down into earnings calls, as travel brands seek to temper expectations should the virus expand even further than it currently has. It appears that the worst has yet to come, and the management team is aware of this upcoming global challenge. Yet, CEO Darren Huston down-played the Ebola threat:
Ebola is out there. We've had issues in the past like SARS that have been much more impactful. I want to be clear, we're not seeing that kind of impact in our numbers, but I would have it on the list of negative things. It's big enough to be on the list, but probably at the bottom of the list.
Of course, Asia is far more densely populated, especially for business travelers, so it's understandable that Ebola generally isolated in West Africa would have a smaller impact than SARS in Asia.
Yet, with the American Centers for Disease Control projecting 1.4 million cases worldwide in the next 4 months, this is a serious issue that will certainly impact forecasts and actual earnings across the travel industry - especially if there's an increase in overall travel bans and restrictions.
Also of note was the management team's commitment to investing capital for long-term growth. This includes the $2.6 billion purchase of restaurant reservation behemoth OpenTable, which many analysts believed was an inflated price for the business.
However, by investing in bringing together new areas of hospitality, the company can begin to consolidate the user experience to become a more comprehensive travel resource. It's also imperative for the brand to not rest on its gilded laurels, as the likes of TripAdvisor also invests in restaurant bookings.
One huge advantage that OpenTable brings Priceline is its installed software base in restaurants - the opportunities for inter-connectivity are very real, as are value-added packages that include exclusive restaurant experiences. As differentiation becomes every more vital to success in the OTA world, these sorts of synergies add tremendous value to the long-term outlook.
Increased advertising costs for Booking.com and other investments to go against Expedia's strong performance were also drags on analysts expectations.
Notably, the brand also sought to reduce expectations during the Q2 call, suggesting that management had a longer-term view of upcoming headwinds that continues into the final quarter of the year.
However, the guidance from Q2 didn't lead to such a dramatic impact on the stock as it did this year. This might have something to do with the busy travel season ahead; if the team cannot deliver during a peak travel time, then perhaps there is something else amiss with the fundamentals of the business. The emergence of Ebola had also not become a major global issue, so there are certainly other items in play this quarter that weren't there earlier in the year.
Targets for Q4
The company identified the following targets for the last quarter of the year:
- Year-over-year increase in total gross travel bookings of approximately 8% - 15% (an increase of approximately 13% - 20% on a local currency basis).
- Year-over-year increase in international gross travel bookings of approximately 10% - 17% (an increase of approximately 16% - 23% on a local currency basis).
- Year-over-year increase in domestic gross travel bookings of approximately 0% - 5%.
- Year-over-year increase in revenue of approximately 11% - 18%.
- Year-over-year increase in gross profit of approximately 17% - 24%.
- Adjusted EBITDA of approximately $625 million to $665 million.
- Non-GAAP net income per diluted share between $9.40 and $10.10.
Some investors felt these targets were too soft, and wanted to see more action in the short-term to drive revenue and profits for shareholders. With the drop in the stock price, other investors are bullish on the long-term performance of the stock. After all, Priceline Group is now trading at a reasonable 17 times 2015 forecasted earnings.