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How to Play Priceline.com: Has the Stock Gone Up Too Much, Too Fast?

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Despite four earnings expectations beats out of the past four reports, some concerns remain.

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Priceline.com (NASDAQ:PCN) is set to release its first-quarter earnings after the closing bell today. The company's share value has been steadily climbing as analysts have become more confident that the leading online travel agency will show strong growth this quarter, continuing a recent strong upward trend. Historical evidence, however, shows a long-term cyclical trend in which earnings typically bottom out in the first quarter. Even if Priceline manages to buck this trend, the company will need to demonstrate its ability to maintain this growth in the long run by improving margins and broadening its international base.

Priceline.com is currently in the process of overhauling its approach to service provision. Like many service providers of its kind, the shift to mobile platforms has become a top priority for Priceline.com. The attempt to develop a streamlined and efficient mobile platform for its primary services and the creation of mobile-specific products has not been cheap, but these efforts will surely pay off in the long run. Those Luddites who have refused to make a robust expansion into mobile markets have invariably been punished for their thrift. In the short term, however, the costs of building and promoting these services could inhibit profit margins.

Priceline.com has been looking to improve margins and expand its base by focusing on hotel bookings over other travel services. The company has an ever-expanding set of partnerships with hotels and resorts worldwide. (41% more hotels list on Priceline.com now than did so at the same time last year.) The company also maintains a larger international customer base than do many of its competitors, which, if intra-European travel finally picks up, could be a further boon to Priceline.com's growth potential.

Despite four earnings expectations beats out of the past four reports, there remains some concern about whether the stock has been driven up too much, and too quickly. EBITDA margins seem unlikely to improve in the short term as Priceline.com continues to spend aggressively to build a stronger international base and a streamlined mobile system. This aggressive spending may cement Priceline.com's position at the forefront of the online travel agency industry in the long term, but earnings this quarter may cool as that same spending enters full tilt.

My Trade: Selling the May weekly PCLN 690-680 bull put spread and 770-780 bear call spread for $4.50

Risk: $550

Reward: $450

Breakeven: $685.50 and $774.50

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No positions in stocks mentioned.
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