U.S. Markets closed

How Did Priceline Stock Outperform Amazon in the Bull Market?

Zacks Equity Research

The technology sector was one of the worst hit during the Great Recession of 2008-2009. However, the S&P 500 has largely recovered from its closing low on Mar 3, 2009 and increased 212.8% since then.

The Priceline Group Inc. PCLN and Amazon.com AMZN are two very important names on the S&P 500 index and key players in the Internet commerce sector. While Priceline boasts a leading position in the online travel booking space, Amazon is one of the largest e-commerce retailers in the world.

We note that since Mar 3, 2009, Priceline shares have appreciated 2128.6% compared with Amazon’s gain of 1140.6%. The Zacks Internet Commerce industry in comparison has appreciated 436%.

Let’s see how Priceline has managed to crush Amazon in the bull market.

Priceline’s Overseas Edge

International markets offer better prospects to Priceline compared to Amazon. Priceline had been generating the bulk of its business from international markets where growth prospects are greater than in the domestic market. Priceline is very strongly positioned in Europe and has been continuously increasing penetration rates there.

The company has increased its focus on China and other Asian countries through Agoda, booking.com and more recently, Ctrip. China is expected to see the strongest growth in both business and leisure travel and Priceline’s agreement with Ctrip enables it to share inventory and thereby capture outbound traffic from China. It is also able to use Ctrip’s inventory for people looking to travel to China.

Meanwhile, currency fluctuations remain an overhang on Amazon’s international business, significantly affecting the company’s e-commerce results. The situation may not change much in the near term. The risk should be hedged however as Amazon Web Services (AWS) increases in the mix.  AWS revenues are dollar-denominated while a lot of the assets are located in low-cost regions. This implies that reduced competitiveness from rising dollar will potentially be compensated by lower costs.

Amazon.com, Inc. Revenue (TTM)

Amazon.com, Inc. Revenue (TTM) | Amazon.com, Inc. Quote

However, AWS brings an element of cyclicality into the business. Therefore, there will be periods during which the company will build out at the cost of profits and cash flows followed by periods during which increased operating leverage will translate into improved profitability. AWS is still a small percentage of Amazon’s total business, but still has a significant impact on its profitability because of the low-margin profile of the retail business. As AWS grows as a percentage of sales, it will exert greater influence on profitability.

Online Growth Opportunities

In Priceline’s case, the online travel booking segment has secular growth drivers. The biggest of these is the shift from offline to online booking. The extremely fragmented travel market had been offering significant growth opportunity. The strong growth rates might lead one to believe that growth through this channel is high, given the proliferation of mobile devices. But market fragmentation is a concern.

The Priceline Group Inc. Revenue (TTM)

The Priceline Group Inc. Revenue (TTM) | The Priceline Group Inc. Quote

Again, many international markets have significantly lower penetration rates than the U.S. Also, there is a growing middle class in most of the emerging markets that depend on the Internet to a great extent. This is a segment companies like Priceline are extremely well positioned to tap. Moreover, the company has a world-class platform which helps it win this business.

However, for Amazon, competition in online retail has been heating up. Traditional retailers have always provided the strongest competition and a number of them are running e-commerce sites as well. Additionally, the increased use of the Internet in both developed and developing economies has attracted other players to the space. While big players like eBay EBAY have started using affiliation programs, several smaller companies could also find their own niche.

Though the Chinese market is ripe and Amazon looks to increase penetration in the market, local company Alibaba.com BABA is very well-entrenched there. Apart from Alibaba, Amazon has to contend with a growing number of other home-grown players. Additionally, Alibaba is now targeting the American market, which will greatly increase competition for Amazon. Further, since Amazon’s first mover advantage is likely to moderate over time, some market share erosion seems inevitable.

To Conclude

Considering all these factors, it’s easy to determine that the scales are tilted in favor of Priceline since the last few years. Currently, both Amazon and Priceline carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Where Do Zacks' Investment Ideas Come From?

You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The Priceline Group Inc. (PCLN): Free Stock Analysis Report
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
eBay Inc. (EBAY): Free Stock Analysis Report
Alibaba Group Holding Limited (BABA): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research