UPDATE: Morgan Stanley Downgrades priceline.com (PCLN) to Equalweight; More Expensive to Grow

January 31, 2013 6:49 AM EST
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(Updated - January 31, 2013 11:07 AM EST)

Shares of priceline.com (NASDAQ: PCLN) are under pressure Thursday following a rare downgrade.

Morgan Stanley downgraded the Internet travel company from Overweight to Equalweight, saying it is getting more expensive for the company to grow. The firm also lowered their price target from $750 to $730.

"We are downgrading Priceline shares to Equal-weight on fears of rising customer acquisition costs, heightening competitive dynamics and limited upside to our PT, analyst Scott Devitt stated.

Devitt notes that over the last three years priceline has grown gross bookings at a 46% CAGR and expanded EBITDA margins as a percentage of gross profit by 630bps. This was related to: 1) Booking.com was the only agency model of scale in Europe with a compelling value proposition for hotels and travelers, 2) Booking.com improved advertising ROI through its expertise in desktop search engine marketing (SEM), and 3) a global offline-to-online shift in hotel bookings.

However, now things are getting tougher, according to the analyst.

Over the next three years, Devitt expects priceline bookings to grow at a 19% CAGR and EBITDA margins to contract by 220bps. "PCLN is entering a new landscape with a strong number two competitor in Europe (Expedia, Equal-weight)," the analyst notes. "We expect greater online advertising deleverage due to a more competitive environment for paid search marketing, Google’s travel initiatives and lower advertising ROI in newer markets. Furthermore, the rapid shift to mobile bookings is a threat to PCLN given its core expertise lies in desktop SEM."

The firm lowered their near-term profitability estimates by 1-2% to account for advertising deleverage and the new Booking.com US marketing campaign. The firm's FY13 EPS goes down from $38.84 to $38.12, which is still above the consensus of $37.43. FY14 EPS goes from $44.84 to $43.87, which is below the consensus of $44.26.

For an analyst ratings summary and ratings history on priceline.com click here. For more ratings news on priceline.com click here.

Shares of priceline.com last traded at $675.77, down 2.8 percent.

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