Shares of The Priceline Group bounced today after analysts from Morgan Stanley upgraded it for the end of the battle with Google. Their upgrade comes on the heels of one from Barclays last week. It also comes at a key time as analysts have been defending the online travel agency in light of the Brexit vote. Priceline has quite a large exposure to the European travel market, but most analysts agree that Brexit won’t weigh on the company as much as investors initially thought.
“Attractive entry” point for Priceline
Morgan Stanley analyst Brian Nowak and team said in a report dated June 30 that they have upgraded Priceline stock from Equal-weight to Overweight and raised their price target from $1,330 to $1,525 per share. They note that the efficiency of ad spend makes or breaks profitability at online travel agencies and that ad spend was 35% of Priceline’s gross profits in 2015.
After four years of declining, they believe the company’s return on investment on its ad spend stabilized in the first quarter. They attribute this to lower cost per click competition on Google between Priceline and Expedia “as the 2 leading OTAs show the first signs of acting as rational players in a global duopoly.”
They add that Priceline’s margins are finally expected to rise as its incremental bookings per incremental ad dollar surged 78% year over year in the first quarter after tumbling by about 25% in 2015. They believe the “more rational ad environment” will enable this to continue, so they reduced their forward ad spend and now expect the company’s adjusted EBITDA margins to rise this year, marking the first time in five years.
Priceline to lead in alternative accommodations
The Morgan Stanley team explained that selection drives conversion online because online shoppers are shopping across hotels and various alternative accommodations. They believe Priceline will steal market share as it has more than 422,000 vacation rentals and an advantage in user reach as it has more than twice as many users. As a result, they’ve increased their room night projection for 2015 by 2% with a 34% compound annual growth rate in alternative accommodations between 2015 and 2018. They expect this segment to drive 28.5% of bookings on Priceline.
Nowak and team also list four areas in which they could be wrong on the company. Of course Brexit is the biggest wildcard here, but they estimate that the U.K. only makes up about 6% of bookings on the platform. Additionally, they say online travel has proven to be more resilient than some had feared. They also say an ad war could return and envision the possibility of a direct bookings battle with hotel chains. The last area they could be wrong on is alternative accommodations, which, as noted, makes up a good chunk of their bullish thesis.
Priceline shares jumped more than 1% in early trading before reversing course. The stock is up 0.6% at $1,246.87 as of this writing.