Is Priceline Now Priced for Gains?

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After a five-year 1,200 percent return, it seems logical that in the midst of a market correction, Priceline (NASDAQ:PCLN) shares would fall. Unlike peers Expedia (NASDAQ:EXPE) and Orbitz (NYSE:OWW), Priceline has not traded particularly volatile during its five-year run, as its gains have been rather consistent. However, in this particular case, large gains might not necessarily imply an overvalued stock.

Priceline’s valuation in question

Priceline has become the quintessential face of travel, and not just because of its U.S. operations — but rather widespread success on a global scale. Its $61 billion market capitalization is many times larger than its next largest peer, Expedia, and for many, this has been a major hit at Priceline.

Priceline trades at a rather excessive nine times sales ratio compared to 1.9 and one times sales, respectively, for Expedia and Orbitz. Thus, with every one dollar in revenue for Priceline being nearly five times more valuable than Expedia’s, some have begun to turn more bearish on Priceline’s stock.

More than deserving

The problem with this logic is that Priceline more than deserves the premium it has been given. This is a company that has thrived in making investments and growing in emerging markets at a rate that exceeds the overall industry’s growth. Specifically, Priceline has a return on assets ratio of 17.9 percent, which is a measure of how much profit is derived from total assets. Hence, if Priceline makes acquisitions, and assets are increased, a return on total assets is a good illustration of a company’s success or lack thereof in making acquisitions.

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