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Why Priceline’s Margin Is on a Downtrend

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Analyst estimates

Analysts are estimating Priceline’s (PCLN) 3Q17 EBITDA[1. earnings before interest, tax, depreciation, and amortization] to increase 13% year-over-year (or YoY) to $2.1 billion. Analysts expect Priceline’s 4Q17 EBITDA to increase 15.7% to $1.0 billion. The company’s earnings growth for both quarters would be primarily due to its revenue growth as margins are expected to decline. 

Priceline’s 3Q17 margins are expected to fall to 49.5% from 51.5% posted in 3Q16. For 4Q17, its margins are expected to decline to 27% from 37% posted in 4Q16.

For fiscal 2017, Priceline’s EBITDA is expected to grow 15.1% to $4.8 billion, which is higher than analysts’ earlier estimate of 14.2% YoY growth. Revenue growth is expected to be the company’s key driver, as its EBITDA margin is expected to decline to 38.0% in 2017 from 38.5% in 2016.

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Commissions are decreasing

Priceline’s falling margins have resulted from the declining commissions it receives on its bookings. Commission rates are decreasing due to the intensifying competition with rivals Expedia (EXPE) and TripAdvisor (TRIP).

The growth expected to come from China and other emerging markets should add to this competitive pressure. International players like Alibaba (BABA) are already pursuing aggressive growth in this space.

Outlook

For 3Q17, Priceline’s management expects its gross profit to increase 15.5%–20.5% (12.5%–17.5% on a constant currency basis). This would lead to an adjusted EBITDA reading of $2.0 billion–$2.1 billion for 13.0% YoY growth at the guidance midpoint. 

The company’s management expects its GAAP[2. generally accepted accounting principles] earnings per share to increase to $31.70–$33.40 for 221.0% YoY growth. This increase is due to the $941.0 million goodwill impairment charge in 3Q16.

Investors can gain exposure to Priceline stock by investing in the PowerShares Dynamic Large Cap Growth Portfolio (PWB), which holds ~3.2% of its portfolio in the stock.

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