Can Priceline (PCLN) keep traveling higher? Shares of the online travel site are up nearly 30% in the last 52 weeks and around 12% just this year.
Priceline is to report fourth-quarter 2016 results on Monday, Feb. 27. Analysts are looking for revenue of $2.32 billion, up 16% year to year, and earnings per share of $13.93.
Total gross bookings are expected to be up anywhere from 16-21% or in a range of $13.9 billion to $14.5 billion. Analysts anticipate gross profits to rise about 18% to $2.2 billion.
Previously, management said fourth-quarter room nights would grow 20-25%. At the midpoint, that works out to an estimated 124 million room nights booked in the fourth quarter. The company booked 150 million room nights globally in the third quarter, up 29%.
For full-year 2016, analysts expect a 16% rise in total revenue to $10.7 billion.
I have three problems with Priceline: tough comparisons; increasing competition and higher marketing expenses; and valuation.
While I have no doubt Priceline will be able to post another strong quarter, the company faces some stiff comparisons going forward. For example, in the first quarter of 2016, total bookings were up 21%. Analysts are looking for total gross bookings to be up 18% in the current quarter, which is below last year's level. Easter shifts into the second quarter this year, so first-quarter guidance might be lower than investors are expecting.
What's more, Priceline said its third-quarter "spend to bookings" ratio increased to 6.03% from 5.77%. Increasingly, the company has to spend more money on marketing to bring customers to its platform.
In 2013, advertising spend was just under 34% of total gross profits. For 2016, the percentage of gross profit spent on advertising is estimated at 37% and it's likely to be close to 40% by 2018. Marketing expense is rising faster than revenue. So, while Priceline remains the king of online travel, it's getting expensive to stay on top.
The online reservation business is increasingly crowded. Expedia (EXPE) - Get Expedia Group, Inc. Report , TripAdvisor (TRIP) - Get TripAdvisor, Inc. Report , Trivago (TRVG) - Get trivago N.V. Sponsored ADR Class A Report and even sites such as AirBnB and Alphabet (GOOGL) - Get Alphabet Inc. Class A Report are aggressively spending on marketing to get a piece of the pie.
Hotels are working hard to keep customers loyal with reward programs. In addition, the merger of Marriott MAR and Starwood gives Marriott tremendous leverage over the hotel-booking industry.
Finally, Priceline is trading at the top of its historical forward valuation, or 22 times forward EPS estimates. Wall Street is forecasting 2018 EPS of $74.49. For the stock to move much higher, estimates will also likely have to increase.
I would be cautious going into earnings. There might not be any room left at the lodge.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.