One thing that I have grown to appreciate about investing is
that it is a pursuit that you get better at over time.
#-ad_banner-#This is a game in which experience counts. And
there is no experience that provides a better source of
investment lessons than the mistakes you've made yourself.
Mistakes aren't always those of commission (although I've made
plenty of those). There are also errors of omission, as in things
that you didn't do but should have.
For example, in 2004, when
had its IPO, a friend of mine pounded the table and told me that
I "had to own" the company. I thought he was crazy because to me
Google looked very expensive on both a price-to-earnings (P/E)
and price-to-cash flow basis.
I was wrong. While Google did look expensive relative to other
companies, it was not even close to being expensive relative to
its future earning power. What I didn't appreciate was that
Google had a tremendous moat around its business and massive
growth in front of it.
went from $50 in 2004 to well over $500 today.
The lesson I learned is that it is worth paying up (within
reason) to own the very best companies with the very best growth
prospects. A high rate of growth can quickly make an expensive
looking share price appear like a real bargain.
Today I'm taking the lesson I learned from Google a decade ago
and applying it to
Priceline Group (Nasdaq:
. This is an unusually high-quality company with very compelling
growth prospects ahead of it that make its current valuation an
attractive entry price.
Priceline's stock chart is a thing of beauty. A few years ago,
a chart like this would have left me thinking that I had missed
the boat on this company.
Today, I think differently. What the stock price has done in
the recent past is completely irrelevant. All that matters is the
price you pay to today relative to the future earnings the
company will generate.
Priceline has established itself as the 800-pound gorilla of
the online travel industry. Its products include Booking.com,
which provides online hotel reservation services on a global
basis. The moat around this business is the nearly 425,000 hotels
in Priceline's network and the 30 million unique visitors to its
website each month.
Priceline has had fantastic growth in recent years: Its
earnings have grown from $193 million in 2008 to $1.9 billion
last year. That is a compounded growth rate of almost 60% over
The moat around this business is the nearly
425,000 hotels in Priceline's network and the 30 million
unique visitors to its website each month.
With that kind of growth, Priceline should be an expensive
That is what we can see out of the rearview mirror. What
matters is what lies ahead. Despite its recent growth and
well-established competitive moat, Priceline still only controls
4% of the global travel booking market. Priceline could double
its market share and still not control 10% of the market at its
The wind at Priceline's back is the continued move to online
booking by people all over the globe. The traditional travel
agent is going the way of the dinosaur.
So let's talk price.
Today, with a share price near $1,160, Priceline is trading at
an eye-opening 33 times its $1.9 billion in earnings over the
past 12 months. Ten years ago, that multiple would have been
enough to send me on to the next company.
Today I'm keeping an open mind, and if we look forward five
years, the current share price may actually turn out to be a
Over the past five years, Priceline has increased earnings at
a compounded annual rate of 60%. That rate of growth might not be
sustainable, but even if assuming that Priceline's rate of growth
slows to 35% over the next five years, the company would have
earnings of $8.5 billion in 2018.
At a market earnings multiple of 20, that $8.5 billion of
earnings would give Priceline a share price five years from now
of $2,901 -- 250% higher than where it is today. That is an
attractive return, and I might be overly pessimistic in applying
a 2018 P/E multiple of only 20 to a company growing earnings at
35% per year.
My experience with Google opened my eyes to the power of a
dominant company in a high-growth business. I wouldn't pay such
an expensive multiple for just any company -- but I would for the
right high-return business.
Priceline enjoys a high rate of return and posted an excellent
35% return on equity in 2013. The company is able to achieve that
high rate of return on equity because, like Google, it has built
a protective moat around its business. Priceline's network of
hotels and 30 million Web visitors a month see to that.
However, that high rate of return actually creates a risk for
Priceline. Returns on equity like what Priceline is earning tend
to draw powerful companies with big bankrolls looking for a piece
of the action. One such potential competitor is actually Google
which recently made some noise by establishing some relationships
Risks to Consider:
At 33 times earnings, Priceline's trailing P/E is higher than
the market average. In a severe correction, higher-multiple
stocks get hit the hardest. Also, the online travel business is a
high-margin industry that attracts a lot of competition. If
bigger, better-financed companies start aggressively focusing on
online travel, it could slow Priceline's growth rates.
Action to Take -->
Over the long term, I expect Priceline will prove a good
investment at its current price, but with the market five years
into a bull run, it is possible that a sell-off is coming. A
buy-and-hold strategy should serve investors well at the current
share price, but accumulating shares on the dips might work