Why Priceline's problems may soon be tech's problems
Sometimes it seems like the tech industry is its own little world, comfortably insulated from the turmoil that might be happening in other parts of the global economy. That seemed the case back in 2009, when the streets of San Francisco seemed much more bustling with startup activity than anywhere else in the country.
Many of the startups that emerged during the course of the Great Recession have quickly grown to become successful business models that are pursuing expansion in Europe and Asia. In doing so, they are finding it harder to stay immune to the turmoil in other economies. Those facing this conundrum might keep an eye on Priceline, which has been getting hit by economic forces beyond its control.
Priceline, of course, is one of the rare Internet companies that can lay claim to a successful turnaround. Once an obscenely valued dot-com startup, Priceline found a second chance through its purchase of overseas travel companies like the Europe-based Booking.com. By March 2014, the stock had risen as high as $1,378, a 59-fold rise over the past decade.
Priceline's current CEO Darren Huston has been laying plans to keep Priceline's stock appreciating, but since the peak last March Priceline has lost 25 percent of its value. Last week, the stock fell below the $1000 mark. It since rebounded a bit, trading at $1,035 this morning. And the primary reasons for Priceline's lackluster performance have more to do with where it's doing business, rather than how.
About 87 percent of Priceline's revenue comes from international markets - with 60 percent alone estimated to be coming from Europe – but the company reports results in US dollars. The problem is that the dollar has been growing stronger against most major currencies as the EU and Japan have been pushing generous monetary policies that result in weaker currencies. As the company has noted in its SEC filings, “a weakening of the Euro decreases our Euro-denominated net assets, gross bookings, gross profit, operating expenses, and net income as expressed in US dollars.”
Europe's central bank is hoping that these monetary policies will revive economic growth, but the problem for Priceline is this puts the company in something of a double bind. Consumers spend less on travel in tough economic times. Sure, they may look for bargains on an online service like Priceline, but a weak currency gives them less spending power abroad.
Priceline has been doing what it can. Gross bookings in the most recent quarter rose 32 percent on year to $13.8 billion. On the one hand, growth above 30% is impressive for any company Priceline's size. On the other, that rate is below the 38 percent growth rate for all of 2013.
And that 32 percent rate was last quarter, before the Euro began its recent dive against the dollar. After the European Central Bank unveiled an aggressive quantitative-easing package this week the Euro fell to $1.12 and is sure to decline further. Last summer, the Euro was worth closer to $1.37. And some believe Euro parity with the dollar is possible this year.
Of course, the stronger dollar may lure more Americans to travel abroad to Europe or Asia. But Priceline's bold turnaround plan was centered on buying travel sites favored by travelers outside the US. It faces stronger competition from Expedia, Orbitz and others inside the US market. Such concerns prompted three analysts to downgrade their ratings on Priceline's stock in recent weeks.
The ironic thing is that, as Priceline's growth is slowing and its stock slumping, the company itself is taking creative steps to secure future growth in a competitive market. Most notably, it bought Opentable for $2.6 billion, giving Priceline a restaurant-reservation service and mobile app to expand to its non-US markets. The company also recently launched a mobile-focused, last-minute booking option dubbed Booking Now that will compete with the popular startup HotelTonight
But Huston's Priceline has also pushed into other areas. Though Priceline has long touted “cheap rental cars,” it pushed into luxury rental cars last June, tapping into a global market growing by 14 percent a year. A few months later, it invested $500 million through convertible bonds in Shanghai-based Ctrip, in a deal that allows Priceline to buy up to 10 percent of Ctrips shares in the open market.
The Ctrip deal may have the biggest potential of all of Priceline's recent moves. It cements a partnership that will give both companies access to each other's inventory. Priceline customers in Europe and the US can find China accommodations more easily. More importantly in the short term, Priceline can access Chinese tourists who aren't as vulnerable to a strong US dollar.
Priceline has other things going its way. Falling oil prices tends to expand the discretionary spending budgets of consumers, which is positive for travel. And its longer-term moves have slowly strengthened its position to slowly expand its market share in the global online-travel industry. Huston has said the company may make more purchases, although he intends for them to be selective.
Priceline poses an interesting dilemma for investors. For five of the past six years its stock has rallied. The sixth year – 2014 – was one when the company plotted sensibly its future growth, but stalled nonetheless because of global economic turmoil. At what point is a company's promise overcome by the problems externally?
For any tech company pushing aggressively into international markets, such roadblocks are very real. Tech is insulated from other corners of the economy – until it begins to infiltrate those corners, when it becomes as vulnerable to these harsh realities as anyone else.
[illustration by Brad Jonas]