How Fast Will They Grow in 2Q?

May 4, 2016 Priceline Group Inc How Fast Will They Grow in 2Q? Industry View Attractive Stock Rating Equal-weight Price Target $1,330 MORGAN STANLEY & CO. LLC Brian Nowak, CFA Brian.Nowak@morganstanley.com Michael Costantini Michael.Costantini@morganstanley.com Owen Hyde Owen.Hyde@morganstanley.com Kevin Liu Kevin.Liu@morganstanley.com +1 212 761-3365 +1 212 296-8248 +1 212 761-7036 +1 212 296-8180 Solid and accelerating 1Q results with noisy 2Q guide as increased branded ad spending is on its way...but full year 2017 non-gaap EPS only falls by 5%. Maintain EW, $1,330 PT. Strong 1Q Beat PCLN delivered strong 1Q:16 bookings results (an acceleration on a one- and two- year basis, ex FX), and 1Q non-gaap EPS was 5% better than we expected...and notably better than PCLN typically performs vs. the top end of its guidance. In fact, the 10% beat vs. the top end in 1Q:16 is the largest non-gaap EPS beat in 2 years (see Exhibit 1). 1 PCLN also called out "solid ROIs for performance marketing" that were "better than [PCLN's] guidance forecast," which is a sign their advertising spend continues to yield results....but a Noisy 2Q Guide With Many Moving Pieces: The top-end of 2Q total ex FX bookings growth (11%-18%) was 400bp lower than our previous estimate and 100bp below the Street, but we remind investors of 1) PCLN's relatively high visibility (average booking window of 30-45 days) and 2) typical conservatism (beating the top-end of total ex FX bookings by an average of ~300bp over the past 9 quarters). As such, our 2Q ex FX bookings estimate only falls by 100bp to 21%. The Easter Shift, Leap Year, Chinese New Year (1Q room night tailwinds) and Ramadan/Euro Cup (2Q room night headwinds) create noise around sequential room night growth, but for perspective, our forecast implies 2% 2Q sequential room night growth...or ~700bp lower than the 9% average over the past 4 years. At the same time, profitability guidance was lighter than expected, as the top end of 2Q adjusted EBITDA guidance ($740mn-$795mn) was 17% below us and 16% below the Street. This lower 2Q profitability will be driven by 1) increased branded ad spending on TV and digital (in particular, around Booking.com in the US), the Easter Shift (with ~$40mn of EBITDA moved from 2Q into 1Q), continued hiring in the core OTA business, and performance advertising spend. PCLN's top-line conservatism has historically led to EBITDA upside as well (beating the top end of non-gaap EBITDA guide by an average of 6% the past 9 quarters)...so we settle above guidance even with more spending at ~$860mn of 2Q:16 adjusted EBITDA. Lowering '17 non-gaap EPS by 5%; Maintain EW, $1,330 PT: Flowing through the 1Q results and 2Q guidance, our '16/'17 non-gaap EBITDA falls by 2%/2%. Our revenue falls by 3%/2% in '16/'17, but this is largely due to a new expectation of falling ADRs for the remainder of the year (given management commentary around current trends). We are also lowering our share repurchase assumptions in 2016 for recent trends (now modeling $1.2bn of buybacks vs. $2.25bn previously). In all, our 2016 and 2017 non- Priceline Group Inc ( PCLN.O, PCLN US ) Internet / United States of America Stock Rating Equal-weight Industry View Attractive Price target $1,330 Shr price, close (May 3, 2016) $1,354.64 Mkt cap, curr (mm) $69,546 52-Week Range $1,476.52-954.02 Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

GAAP EPS falls by 3%/5%. We maintain our EW rating and $1,330 PT. Priceline Group Inc May 4, 2016 2

Risk Reward Why Equal-weight? The OTAs are running out of hotel room night runway, which will likely lead to slowing room night growth and rising direct competition We see top-line pressure from rising hotel take rate concessions We see EBITDA margin pressure as Google's mobile travel products drive up the cost of paid search, and PCLN increasingly spends on less measurable advertising channels like TV Valuation keeps us from going Underweight Source: Thomson Reuters, Morgan Stanley Research Price Target $1,330 Bull $1,650 20X 2017e bull case adj. EPS of $81.79 Base $1,330 17X 2017e base case adj. EPS of $77.48 Bear $1,000 15X 2017e bear case adj. EPS of $68.35 Price target is derived using a 10-year discounted cash flow (DCF) analysis. We assume a WACC of 10% and a 2% perpetual growth rate. Our bull case assumes '14-'18e gross profit growth of 16%, EBITDA margins as % of gross profit of 43% in 2018, and $81.79 in 2017 adj. EPS. This is driven by 1) higher than expected ad spend efficiency, 2) reduced dependence on Google for traffic, and 3) industry consolidation leading to opex scale benefits and higher take rates. Our base case assumes '14-'18e gross profit growth of 15%, forward EBITDA margin (as % of gross profit) compression of ~540bp to 40% in 2018, and $77.48 in 2017 adj. EPS. This is driven by '14-'18 gross profit per room night growth of -4% (vs. - 1% historical growth) and '14-'18e ad spend per room night growth of 0% (vs. +5% historical growth). Our bear case assumes '14-'18e gross profit growth of 13%, ~850bp of forward margin pressure (EBITDA margins as % of gross profit of 37% in 2018), and $68.35 in 2017 adj. EPS. This is driven by 1) lower than expected ad spend efficiency and increasing TV ad spend, 2) increasing dependence on Google for traffic, especially on mobile, and 3) industry consolidation leading to higher than expected competition and lower than expected take rates. Risks to Achieving Price Target Higher ad spending leads to accelerating room night growth (upside) Mobile app user bases grow larger than mobile browser user bases, reducing dependence on Google for mobile search traffic (upside) Better than expected ad spend efficiency or reduced spending on TV advertising (upside) Industry consolidation leads to scale benefits over operating cost structure, more bargaining power vs. hotel/air suppliers, and ultimately, higher profitability (upside) Increased/lower-than-expected shareholder returns (upside/downside) The cost of acquiring traffic on Google rises more than we expect, and PCLN increasingly has to spend on less-measurable and less-efficient TV advertising and mobile app install ads (downside) Online travel industry competition rises more than we expect, leading to more ad spend and lower hotel take rates than we anticipate (downside) Continued and prolonged investments/m&a in non-core businesses such as OpenTable and Booking Suite (downside) Potential Catalysts 2Q:16 results and forward guidance Evidence of lower/higher ad spending, especially on TV (upside/downside) Accelerating/slowing room night growth (upside/downside) 3

Analysis Exhibit 1: PCLN's 1Q:16 EBITDA beat vs. the top-end of its guidance was notably larger than its historical trend Priceline Adj. EPS Beats vs. Top End of Guidance 16.0% 14.0% 12.0% 1% 8.0% 6.0% 4.0% 2.0% % 3.5% 14.3% 7.1% 11.2% 9.0% 12.0% 7.0% 7.4% 9.7% 6.1% 2.5% 3.1% 8.8% 2.6% 6.1% 6.7% 14.0% 4.1% 5.0% 7.4% 4.7% 5.9% 3.7% 6.1% 1Q:10 2Q:10 3Q:10 4Q:10 1Q:11 2Q:11 3Q:11 4Q:11 1Q:12 2Q:12 3Q:12 4Q:12 1Q:13 2Q:13 3Q:13 4Q:13 1Q:14 2Q:14 3Q:14 4Q:14 1Q:15 2Q:15 3Q:15 4Q:15 1Q:16 9.8% Priceline Adj. EPS Beats vs. Consensus Average Source: Company data, Morgan Stanley Research 4

1Q:16 Results vs. Morgan Stanley Estimates 5

Exhibit 2: PCLN 1Q:16 Results vs. MS Estimates Priceline Group Inc May 4, 2016 Source: Company data, Morgan Stanley Research 6

Changes to Our Estimates Exhibit 3: Changes to our PCLN Estimates Priceline Prior vs Current Estimates ($ in millions) in $ millions (ex EPS) 2016 2017 2016 2017 2016 2017 Income Statement Prior Prior Current Current Revision Revision Total Gross bookings 66,878.8 77,568.0 67,040.9 78,650.6 0.2% 1.4% % change Y/Y 20.4% 16.0% 20.7% 17.3% 29 bp 133 bp % change Y/Y (constant currency) 22.8% 16.1% 23.3% 17.2% 53 bp 108 bp Total Revenue 11,360.3 13,105.8 10,989.1 12,788.9-3.3% -2.4% % change Y/Y 23.2% 15.4% 19.1% 16.4% (402) bp 101 bp Cost of Revenue 1,012.1 1,087.4 765.0 907.0-24.4% -16.6% Gross Profit 10,348.2 12,018.4 10,224.1 11,881.9-1.2% -1.1% Gross margin (% of gross bookings) 15.5% 15.5% 15.1% 15.1% (35) bp (39) bp Gross margin (% of revenue) 91.1% 91.7% 93.0% 92.9% 195 bp 121 bp Total operating expenses (GAAP) 6,454.0 7,654.7 6,406.4 7,643.6-0.7% -0.1% Operating Income (Adjusted) 4,342.3 4,839.5 4,270.4 4,722.0-1.7% -2.4% Operating Margin (% of gross profit) 42.0% 40.3% 41.8% 39.7% (19) bp (53) bp Adjusted EBITDA 4,485.2 5,023.6 4,397.7 4,905.8-2.0% -2.3% EBITDA margin (% of gross profit) 43.3% 41.8% 43.0% 41.3% (33) bp (51) bp Incremental EBITDA margin (% of gross profit) 43.4% 32.2% 41.4% 30.7% (206) bp (158) bp Y/Y % Growth 20.5% 12.0% 18.1% 11.6% (235) bp (45) bp Other Interest Income 68.5 75.3 79.4 83.4 16.0% 10.7% Interest Expense (171.8) (171.8) (186.3) (186.3) 8.4% 8.4% Foreign Currency & Other (63.3) -- -- Total Other (103.4) (96.5) (170.2) (102.9) 64.7% 6.7% Income (Loss) Before Taxes (Adjusted) 4,238.9 4,743.0 4,166.5 4,619.1-1.7% -2.6% Provision for Income Taxes (Adjusted) (657.0) (735.2) (667.7) (740.3) 1.6% 0.7% Tax Rate (Adjusted) 15.5% 15.5% 16.0% 16.0% 53 bp 53 bp Net Income (Adjusted) 3,582.0 4,007.8 3,498.8 3,878.8-2.3% -3.2% Adjusted Avg Diluted Shares Out 5 49.2 50.5 50.1 1.1% 1.8% Adjusted Diluted EPS $71.66 $81.46 $69.24 $77.48-3.4% -4.9% Source: Company data, Morgan Stanley Research 7

Financials Exhibit 4: Priceline Income Statement Source: Company data, Morgan Stanley Research 8

Exhibit 5: Priceline Balance Sheet Balance Sheet PCLN model (USD millions) 2015 2016E 2017E 2018E 2019E 2020E Balance Sheet Current Assets Cash and Equivalents 1,477.3 3,516.9 5,338.6 7,935.6 10,948.7 14,415.1 Restricted Cash 0.8 0.8 0.8 0.8 0.8 0.8 Short term Investments 1,171.2 1,525.6 1,525.6 1,525.6 1,525.6 1,525.6 Accounts Receivable, net 645.2 822.2 947.9 1,073.5 1,215.6 1,359.0 Prepaid Expenses and Other Current Assets 258.8 329.8 380.2 430.5 482.7 539.7 Deferred Tax Assets Total Current Assets 3,553.2 6,195.3 8,193.2 10,966.1 14,173.4 17,840.3 Property & Equipment, Gross 622.0 845.0 1,110.3 1,418.2 1,77 2,164.3 Accumulated Amort 347.2 485.2 669.0 891.1 1,160.5 1,488.9 Net PP&E 274.8 359.8 441.4 527.1 609.6 675.4 Intangible Assets, Net 2,167.5 2,128.5 2,128.5 2,128.5 2,128.5 2,128.5 Goodwill 3,375.0 3,378.3 3,378.3 3,378.3 3,378.3 3,378.3 Deferred Tax Assets Long-term investments 7,931.4 7,594.3 7,594.3 7,594.3 7,594.3 7,594.3 Other Assets 118.7 68.7 68.7 68.7 68.7 68.7 Total Assets 17,420.6 19,725.1 21,804.5 24,663.2 27,953.0 31,685.6 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable 322.8 415.5 460.8 501.5 542.9 577.1 Accrued Expenses & Other 681.6 877.2 970.9 1,077.5 1,160.3 1,259.0 Deferred Merchant Bookings 434.9 576.2 597.8 616.1 677.1 734.7 Income Taxes Payable Other Current Liabilities & Convertible Debt Total Current Liabilities 1,439.3 1,868.9 2,029.6 2,195.2 2,380.3 2,570.9 Deferred Income Taxes 892.6 830.2 830.2 830.2 830.2 830.2 Other Long-term Liabilities 134.8 143.2 143.2 143.2 143.2 143.2 Long-term Debt 6,158.4 6,321.2 6,321.2 6,321.2 6,321.2 6,321.2 Total Liabilities 8,625.1 9,163.5 9,324.2 9,489.8 9,674.9 9,865.5 Convertible Debt Redeemable Noncontrolling Interests Minority Interests Mandatory redeemable preferred stock STOCKHOLDERS' EQUITY Common stock 0.5 0.5 0.5 0.5 0.5 0.5 Treasury Stock (5,826.6) (7,286.0) (8,886.0) (10,086.0) (11,286.0) (12,486.0) Additional paid-in capital 5,184.9 5,401.5 5,571.5 5,741.5 5,912.5 6,082.6 Accumulated Earnings/(Deficit) 9,191.9 12,147.8 15,496.5 19,219.6 23,353.3 27,925.2 Accum Other Comprehensive Inc 244.9 297.8 297.8 297.8 297.8 297.8 Total Shareholders' Equity 8,795.5 10,561.6 12,480.3 15,173.4 18,278.1 21,82 Total Liabilities + Stockholders' equity 17,420.6 19,725.1 21,804.5 24,663.2 27,953.0 31,685.6 Source: Company data, Morgan Stanley Research 9

Exhibit 6: Priceline Cash Flow Statement Cash Flow Statement PCLN model (USD millions) 2015 2016E 2017E 2018E 2019E 2020E Cash Flow Statement Operating Cash Flow Net Income Adjustments: 2,551.4 2,956.0 3,348.7 3,723.1 4,133.7 4,572.0 Depreciation 101.5 140.2 183.8 222.1 269.4 328.5 Amortization 171.0 17 17 17 171.0 17 Provision for Uncollectible Accounts 24.3 6.8 Reversal of Val Allowance Deferred Income Taxes (61.3) (25.7) Stock-based Comp and Other SBC 249.1 66.0 Amortization of Debt Issuance Costs 7.6 1.8 Amortization of Debt Discount 66.7 17.0 Loss (Gain) on Early Exting. of Debt Equity in Income of Investees Loss on Impairment 50.4 Changes in Working Capital Accounts Receivable (68.7) (156.8) (125.7) (125.6) (142.1) (143.4) Prepaid Expenses and Other Current Assets (81.6) (46.3) (50.4) (50.4) (52.2) (56.9) Accounts Payable, Accrued Expenses and Other Current Liabilities 166.2 193.3 160.7 165.6 185.1 190.6 Other (23.9) 0.9 Total Changes in Working Capital (8.0) (8.9) (15.5) (10.3) (9.1) (9.7) Total Cash Flow from Operations 3,102.2 3,373.8 3,687.1 4,104.9 4,564.9 5,060.7 Cash Flow from Investing Purchase of Investments Maturity/Sale of Investments (8,669.7) 5,084.2 (1,051.3) 1,252.6 Purchase of shares held by Noncontrolling Int Additions to PP&E (173.9) (223.0) (265.3) (307.9) (351.8) (394.2) Acquisitions and other Equity Investments, Net of Cash Acquired (140.3) (0.7) Proceeds from Redemption of Equity Investment Realized Loss on Foreign Currency Forward Contracts 5.2 Change in Restricted Cash () Total Cash Flow from Investing (3,894.5) (22.5) (265.3) (307.9) (351.8) (394.2) Cash Flow from Financing Proceeds from revolving credit facility 225.0 10 Payments related to revolving credit facility (225.0) Proceeds from Issuance of Convertible Notes/Debt 2,399.0 2.5 Payments of Debt Issuance Costs (4.0) Payments related to Conversion of Convertible Senior Notes (147.6) Repurchases of Common Stock (3,089.1) (1,459.4) (1,60) (1,20) (1,20) (1,20) Proceeds from Exercise of Stock Options 20.9 4.8 Payment of Stock Issuance Costs Excess Tax Benefit on Stock-based Comp 101.5 18.1 Other (10.7) Total Cash Flow from Financing (73) (1,334.0) (1,60) (1,20) (1,20) (1,20) FX Impact on Cash (149.1) 22.3 Net Increase/(Decrease) in Cash Flow (1,671.4) 2,039.6 1,821.7 2,597.0 3,013.1 3,466.5 Cash at Beg of Period Cash at End of Period 3,148.7 1,477.3 1,477.3 3,516.9 3,516.9 5,338.6 5,338.6 7,935.6 7,935.6 10,948.7 10,948.7 14,415.1 Source: Company data, Morgan Stanley Research 10

Exhibit 7: Priceline Discounted Cash Flow Analysis Source: Company data, Morgan Stanley Research 11

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Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. INDUSTRY COVERAGE: Internet COMPANY (TICKER) RATING (AS OF) PRICE* (05/03/2016) Brian Nowak, CFA Alphabet Inc. (GOOGL.O) O (08/11/2015) $708.44 Amazon.com Inc (AMZN.O) O (04/24/2015) $671.32 Criteo SA (CRTO.O) E (01/26/2016) $43.00 ebay Inc (EBAY.O) U (04/19/2016) $23.98 Etsy Inc (ETSY.O) E (05/11/2015) $8.40 Expedia Inc. (EXPE.O) E (05/01/2015) $115.97 Facebook Inc (FB.O) O (04/27/2016) $117.43 IAC/InterActiveCorp (IAC.O) E (06/26/2015) $47.22 LinkedIn Corp (LNKD.N) E (03/16/2016) $124.91 Match Group Inc (MTCH.O) U (02/01/2016) $11.16 Priceline Group Inc (PCLN.O) E (02/25/2015) $1,354.64 Rubicon Project Inc (RUBI.N) E (01/26/2016) $19.69 Twitter Inc (TWTR.N) U (10/21/2015) $14.01 Yahoo! Inc (YHOO.O) O (03/26/2015) $36.01 Yelp Inc (YELP.N) E (07/29/2015) $22.15 Dean J Prissman Care.com Inc (CRCM.N) E (02/03/2016) $7.55 Groupon, Inc. (GRPN.O) E (02/25/2015) $3.38 GrubHub Inc. (GRUB.N) E (05/04/2016) $24.65 RetailMeNot Inc (SALE.O) E (07/13/2015) $7.64 Shutterstock Inc (SSTK.N) U (07/13/2015) $40.31 TrueCar Inc (TRUE.O) E (07/13/2015) $6.14 Zillow Group Inc (Z.O) O (07/13/2015) $25.06 Zynga Inc (ZNGA.O) E (07/13/2015) $2.32 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. 2016 Morgan Stanley 15