Overall, the online-travel business is extremely competitive, with very low barriers to entry, as competitors such as Expedia, Travelocity and Orbitz ( OWW) all fight to win business. Flash-travel Web sites such as Jetsetter and Vacationist have also become quite popular, introducing a new method of buying travel online. And with the recent introduction of Facebook deals, and the popularity of group buying sites such as Groupon, travel portals such as Priceline might not be as relevant as in the past. Many travel providers, in an effort to eliminate the middle man, are also using Facebook Business Pages to implement a direct-booking system to reserve hotel rooms. And in what might be considered one of the biggest competitive threats to Priceline, search giant Google ( GOOG - Get Report) recently completed the acquisition of ITA Software. ITA provides the technology that powers airline-search functionality for sites such as Kayak.com, Bing.com and TripAdvisor.com. While Priceline generates only about 5% of profits from airline travel , the move by Google could be extremely disruptive to the travel industry. Google is also building out its search technology to include hotel-price ads with booking functionality within organic search results. That could lead to higher customer-acquisition costs for Priceline, namely more advertising dollars spent on Google to capture business. In fact, online-advertising expenses for Priceline's U.S. business grew at a faster rate than gross profit for 2010. Despite the competitive pressures, TheStreet Ratings' quantitative model has a "buy" rating and a $714 target on Priceline, offering nearly 32% upside from current levels. The company scores best for efficiency, which measures a company's strength and historic growth of return on capital. Priceline produced a 23% return on invested capital (ROIC) in its most recent quarter, which scores greater than 90% of the companies we review. With a current ratio exceeding 4, and a debt-to-equity ratio of 26%, Priceline also scores highly for overall solvency, which measures the ability to meet current and future debt requirements. Our model doesn't like the overall volatility for the stock, given the three-year beta of 6.15, and the valuation, with the stock currently trading at 53 times trailing 12-month earnings. However, on a forward-looking basis, the stock is more reasonable, trading at just 28 times 2011 and 22 times 2012 estimates. If expected annualized growth of 22% can be achieved over the next several years, the stock appears attractive, trading at a PEG of only 1 on 2012 estimates.
Among Priceline's direct competitors, CTrip ( CTRP - Get Report) is the only other stock rated a "buy" by TheStreet Ratings' model. Orbitz is rated "sell," with Expedia and Travelzoo ( TZOO - Get Report) rated "hold." CTrip is a China-based travel provider and a direct competitor to Priceline's Asian subsidiary, Agoda.com. Priceline is now an international growth story, offering the best so-called pure play on increased penetration for online travel in international markets. The stock is not without risk, as the competition is fierce, with recent strategic moves by Google only adding to the fire. For investors with a high appetite for risk looking to capitalize on growth in the European, Asian and South American travel markets, Priceline appears to be an attractive investment.