Morgan Stanley Upgrades The Priceline Group (PCLN) to Overweight; 'Ad War is Over', Says Analyst
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(Updated - June 30, 2016 8:36 AM EDT)
Morgan Stanley upgraded The Priceline Group (NASDAQ: PCLN) from Equalweight to Overweight with a price target of $1,525. The bank's bull case on the stock is $1,750 and its bear case is $1000.
Analyst Brian Nowak thinks improving ad efficiency will lead to better margins and rising profitability. He also said Priceline is positioned to win in alternative accommodations.
"The 4 year ad war is over," said Nowak. "OTA profitability is made or broken on ad spend efficiency – ad spend was 35% of PCLN's '15 gross profit. After 4 years of decline, we believe PCLN's ad spend ROI stabilized in 1Q:16, which we attribute to lower GOOGL cost per click (CPC) competition between PCLN and EXPE, as the 2 leading OTAs show the first signs of acting as rational players in a global duopoly. Our GOOGL travel keyword CPC analysis underscores this as 50% of CPCs were down y/y, the median CPC down ~6%."
"PCLN's incremental bookings per incremental ad dollar – how we monitor ad ROI – is improving...up 78% y/y in 1Q:16 (after falling ~25%+ in '15). We see this more rational ad environment enabling this to continue, and we lower forward ad spending, now expecting PCLN's adj. EBITDA margins to rise in '16 for the first time in 5 years," continued the analyst.
Discussing alt. accommodations, Nowak said, "As online travelers increasingly shop across hotels and alt. accommodations, we see PCLN, with its 422k+ vacation rentals, leading hotel selection, 2X+ user reach advantage, and best in class traffic acquisition and conversion positioned to take material market share in alt. accommodations. We raise our '17 room nights by 2%, with alt accommodations set to grow at a 34% '15-'18 CAGR, driving 28.5% of bookings."
Shares of The Priceline Group closed at $1239.41 yesterday.
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