November 30, 2000 4:32 PM PST

Commentary: Is the price right for Priceline.com?

Unlike many dot-coms, Priceline.com (Nasdaq: PCLN) has been delivering on its hype every quarter. Priceline is a whisker away from turning a profit, but investors are naming their own price for its shares, which now trade at a 52-week low.

Priceline, whose service allows consumers to name their own prices for things like airplane tickets and car rentals, topped Wall Street estimates Monday with a solid, if not spectacular, quarter. Sales were strong, and the company's loss of a penny a share put it in range for a third quarter profit.

Wall Street's reaction?

Investors beat Priceline to a 52-week low. The failure to meet unofficial "whisper" estimates, "selling on the news," worries over competition and a slip in fee revenue were all blamed by analysts for the Priceline weakness. By the end of Monday's trading session, Priceline was down 22 percent -- congratulations for an upside surprise.

It didn't help that Priceline execs didn't bump up their profit goal. CFO Heidi Miller said on a conference call that analysts shouldn't "be overly aggressive" with their financial models. The company is comfortable that it will be profitable in the first quarter of 2001, but wouldn't step up the date.

Our guess is that Priceline is just playing the expectations game here. Of course, the company wants to balance profits and growth, but it could easily break even a quarter ahead of schedule.

Here are some of the alleged knocks against Priceline and a look at why Wall Street may be overreacting:

Competition: Hotwire.com, an airline ticketing service, is expected to launch in the fall. The catch with Hotwire, however, is that it's backed by six airlines. Hotwire will sell excess airline inventory like Priceline, but hasn't done anything yet. Given that Priceline has fended off Expedia (Nasdaq: EXPE) and a host of others, you shouldn't worry.

"The hullabaloo around Hotwire is just that," said CEO Dan Schulman, arguing that Priceline will continue to resonate with consumers because of its choose-your-own-price model.

We'll find out more about Hotwire later today when we interview its CEO. The story will be posted this afternoon. We've seen way too many hyped start-ups fail to deliver to be too concerned about Hotwire conquering Priceline.

Dependence on airline tickets: Despite plans to expand into a host of other categories, Priceline still depends on airline tickets for the bulk of its revenue. However, officials said the company will be entering into insurance and business-to-business verticals shortly. Priceline is also selling long distance. Merrill Lynch analyst Henry Blodget reckons that less than half of Priceline's gross profits will come from airline tickets.

Fee income: Red flags were raised over Priceline's fee income in the second quarter. This high-margin revenue stream dipped as a percentage of revenue in the quarter to 6.5 percent of sales from 8.5 percent in the first quarter. Management cited its expansion into long distance for the dip.

In the last six quarters, fee revenue has fluctuated as a percentage of sales, and it's not clear if the quarter-to-quarter hysteria is really worth the effort. In addition, the percentage of fee revenue fell because transaction revenue soared in the quarter.

Great expectations: Ever since Yahoo! (Nasdaq: YHOO) reported a blowout quarter, shares of Priceline, eBay (Nasdaq: EBAY) and other dot-com blue chips have been surging. Simply put, expectations are high. Priceline tripled sales from a year ago, but merely grew sales 12 percent in the second quarter.

The logic that Priceline should post a Yahoo-like quarter -- even if it has a completely different business model -- is absurd. Nevertheless, Priceline gave back all of its pre-earnings run-up in a day over those great growth expectations.

Controversy: The Wall Street game largely depends on perception, and Priceline has been a controversial company. Warrants to its airline partners ding the real bottom line every quarter. There have also been questions about how the company books revenue. And then there's the issue surrounding Priceline's Webhouse affiliate. Priceline has expanded into groceries and gas through Webhouse, but has kept the expenses off the books by creating private affiliate companies.

Priceline isn't doing anything fishy in terms of accounting, but the company could do without the controversy. Long-term, Priceline should continue to do well, and Monday's sell-off may turn out to be a "name your own price" entry point to the stock.


• Priceline's upside surprise doesn't impress investors
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