Takeaway: We believe we’ve isolated the main drivers of the story. Tracker beta test suggests accelerating 2Q bookings, but no call on the stock, yet

INTRODUCTION

The Hedgeye Internet & Media and  Gaming, Lodging, Leisure teams are teaming up to jointly cover the OTAs.  We’re beginning with PCLN, which is a complicated story given its scale and broad geographic exposure.  Below, we break down the story into what we believe really matters, i.e. what’s really driving the business amidst all the noise, and what’s moving the story on the margin.  Within that construct (Points 1-4), we have built our first tracker to forecast PCLN’s quarterly bookings and hopefully get ahead of bookings guidance.  Our tracker is currently calling 1Q bookings to exceed guidance/consensus, andfor 2Q bookings guidance (ex Fx) to accelerate off 1Q levels, ahead of current consensus expectations.  This would normally translate into a positive stock move, but we would caution that the stock has performed well in April and expectations are likely higher post EXPE earnings.  Since we’re only in the formative stages of actively following PCLN, we’re uncertain as to sentiment – that is, how much upside is already baked into the stock.   Going forward, we hope to introduce our PCLN tracker results on a more formal basis as we refine/build upon our first tracker, and hopefully introduce an additional one.  We believe we’re on to something, both from a theoretical and pragmatic perspective, and look forward to augmenting your OTA investment process.

KEY POINTS

  1. PCLN = TOP-DOWN STORY: PCLN is effectively the largest public hotel company; its 432M room nights in 2015 are more than 2X that of any public hotel operator.  That said, PCLN is too large to evade macro/industrial trends.  PCLN will remain a secular growth story, but it’s the collective travel economy that will move the story on the margin (i.e. accelerating vs. decelerating bookings growth).  We’re not suggesting that factors such as ad spend and property counts are trivial, but believe they take a backset to the travel economy.
  2. IS AIRBNB A THREAT? If it was a material threat, we should have seen it by now, and maybe we have.  PCLN is highly exposed to the EU – the region was an early Airbnb adopter - but to date we haven’t seen any material correlation between Airbnb density and EU Hotel RevPAR per our proprietary Airbnb real time dataset.  We suspect the big difference b/w the EU and US markets is that there already was an established alternative accommodation market in the EU; Airbnb may just be facilitating that market vs. the US where it is essentially creating it.  That said, we do not suspect Airbnb will have a further material long-term impact on PCLN, but we will be monitoring our dataset on an ongoing basis.
  3. SWING FACTOR = DESTINATION: PCLN’s MD&A and gross profit seasonality suggests that the EU and US drive the bulk of its bookings.  While the overwhelming majority of total travel expenditures in both markets favor domestic travel, those consumers are far more likely to book a hotel, and for an extended period, when traveling abroad.  In short, we believe the travel destinations of PCLN’s users carry the most weight.  Put another way, we believe ARPU drives this story.
  4. TRADING STOCK: While we currently prefer PCLN longer-term as the public OTA that is probably most insulated from both branded hotel & Airbnb headwinds, the volatility around its earnings releases suggest it is more of a trading stock, which is how we’ll be looking to play this moving forward.  On that front, it’s really all about booking guidance vs. consensus, which has driven the stock action in 4 of the last 5 quarters (as far back as we can pull historical consensus bookings estimates).
  5. BETA TESTING OUR FIRST PCLN BOOKINGS TRACKER: The problem with the default tracking metrics that the street is using (i.e STR/flight metrics) is that they track the stay, not the booking; the former is basically pointless.  We’ve built our first in what will hope will be a series of a proprietary trackers to get ahead of room-nights bookings and guidance (see chart below).  Our tracker is based primarily on points 1 & 3 above, and is currently calling for 1Q bookings to eclipse guidance by 2%-4%, and for 2Q16 bookings growth (ex Fx) to accelerate off of 1Q levels.  We’re expecting the midpoint of PCLN’s 2Q bookings guidance range (ex FX) to be in the mid 20s%.  In turn, we believe consensus bookings estimates are light for 1H16.  Note that our tracker applies to PCLN only (not EXPE, TRIP, etc.) 
  6. GOING FORWARD? Even though the tracker is statistically significant and has been successfully back-tested, we’re using the 1Q16 release on Wednesday as a beta test as we work to refine and build upon our tracker moving forward.  To be clear and up front, we believe our tracker will be highly value add and is proprietary, so we will not be divulging the “special sauce” for obvious competitive reasons. We understand the tracker is a prove-it-to-me product at this point; we’re looking at it the same way.  For those reasons, we’re not making a call on PCLN at this point.

PCLN | Beta Test - PCLN   Room Nights Slide

PCLN | Beta Test - PCLN   Airbnb Slide

PCLN | Beta Test - PCLN   Outbound Slide v2

PCLN | Beta Test - PCLN   Tracker 1Q16 slide v1

Let us know if you have questions, or would like to discuss in more detail. 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

Todd Jordan
Managing Director


@HedgeyeSnakeye