From Red Herring:
redherring.com
Fish or Cut Bait: Priceline is cheap, really cheap
By Paul R. La Monica
Redherring.com, August 07, 2000
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By the looks of Priceline.com (Nasdaq: PCLN)'s recent stock performance, you'd think the company
had started a name-your-own-stock-price online brokerage. Priceline hit a 52-week low last Monday
of $23.63, a far cry from its 52-week high of $104, set in March. The stock is down 48 percent for the
year.
Priceline, one of the darlings of the 1999 e-commerce stock craze, has fallen hard, along with
Amazon.com (Nasdaq: AMZN), on investor concerns that e-tailing will never live up to last year's
hype. But the selling of Priceline stock may now stop.
Investors often make the mistake of punishing every stock in a sector because of the bellwether's
problems. It may be tempting to assume that because Amazon is having troubles, so must all
e-commerce companies, but that isn't exactly fair.
I have to admit I thought Priceline was way overvalued when it went public in March 1999, opening at
a 407 percent premium to its offering price and finishing that day with a 332 percent gain. And when
the company started diversifying from its bread-and-butter name-your-own-fare airline ticket
business, I was skeptical that name-your-own-price grocery, gas, and home mortgage rates would
generate enough new customers to justify the marketing expenses.
But now I'm a Priceline believer. Maybe it's because revenue tripled in the second quarter as the
company added 1.5 million new customers. Maybe it's the fact that losses are narrowing. Or maybe
hearing William Shatner's droll, Beatnik-esque versions of the theme from The Jeffersons and Young
MC's "Bust A Move" in Priceline's commercials over and over again has softened me up. (And by the
way, whatever happened to Young MC?) Regardless, I can't help but think Priceline looks really
attractive right now -- if you have the stomach to bottom-fish through the online retailing wreckage.
BIG-NAME INVESTORS
Some savvy investors seem to be doing just that. This past week, Paul Allen's investment firm Vulcan
Ventures and Liberty Media (NYSE: LMG-A), the entertainment programming division of AT & T (NYSE:
T) run by John Malone, bought the rights to purchase $190 million's worth of Priceline stock.
Jay Walker, Priceline's vice-chairman and founder, plans to spend $125 million to fund the growth of
WebHouse Club, the name-your-own-price grocery and gas business Mr. Walker started. WebHouse is
currently a privately held company that is a licensee of Priceline. Priceline has a warrant to buy a
majority equity stake in WebHouse.
Priceline is now trading at about three times estimated 2000 revenue, which is downright cheap for an
Internet stock. Shawn Milne, an analyst with EOffering, says it is not uncommon for quality growth
consumer stocks to trade at about 2.5 to 3 times revenue. But revenue probably won't be the metric
by which to judge Priceline for much longer.
Unlike Amazon and the host of other net income-challenged (to use a politically correct term)
e-commerce companies, Priceline seems very close to attaining that elusive state of B2C nirvana:
profitability. The company is expected to break even in the third quarter and report a profit in the
fourth quarter. In that respect, Priceline is more like eBay (Nasdaq: EBAY) than Amazon.
LOWER COSTS THAN OTHER B2C STOCKS
Priceline also has a lower cost structure than many online retailers, which is especially important as
investors grow increasingly dubious about Internet companies' spending patterns.
Mitch Bartlett, an analyst with mutual fund company Amerindo Investment Advisors, notes that
Priceline's customer acquisition cost is below $11, one of the lowest in the e-commerce sector.
Spending $11 to acquire a customer who is purchasing airline tickets that usually cost well over $300
has led to a "phenomenal" return on investment for Priceline, Mr. Bartlett says.
Mr. Milne says Priceline also doesn't have to build out as much brick-and-mortar infrastructure as
other online retailers. The company doesn't FedEx physical products that need to be stored.
The strength and depth of Priceline's management team should not be ignored either. Unlike Amazon,
which is reeling from the defection of Joe Galli to Verticalnet (Nasdaq: VERT), Priceline has two savvy
Citigroup (NYSE: C) veterans -- Chairman Richard Braddock and Chief Financial Officer Heidi Miller --
and President Dan Schulman, who earned his stripes managing AT & T's $22 billion consumer business.
Yes, there are obviously risks with this stock. And I'm not suggesting Priceline will return to the highs
it hit earlier this year anytime soon. Investors were right to be spooked by the decreased percentage
of fee revenue in the second quarter, since fee-based businesses are more stable and have higher
margins. There's also the fear of more competition as several major airlines are getting ready to launch
Hotwire, a site that will sell discounted tickets.
But when guys like Paul Allen and John Malone plunk down some money on a stock trading at such a
discount, you have to take notice. |
