priceline Stumbles, Overshadowed by Yahoo!'s Success

Damn that Yahoo! (YHOO).

Since the company kicked off the Internet sector's summer earnings season by reporting better-than-expected profits and sales, the shares of other e-tailers have rallied in the hope that they, too, will replicate Yahoo!'s success. Since Yahoo! reported after the bell July 11, priceline.com's (PCLN) shares have risen 23%, Amazon.com's (AMZN) 24% and eBay's (EBAY) 34%.

Alas, poor priceline fell back to Earth Monday when it reported a loss narrower than Wall Street had expected, but apparently not quite as good as the last-minute hype had anticipated. priceline said its loss, excluding certain items, was a penny a share, better than the 3-cent loss anticipated by analysts. Revenue rose to a better-than-expected $352 million, more than triple that of the year-ago quarter and a 12% jump from the first quarter. priceline's shares, however, fell 5 15/16, or 15%, to 34 1/8.

Heath Bar Crunch

"The closer you get to earnings, the more expectations get out of hand," says Heath Terry, an analyst with Credit Suisse First Boston. (Terry rates priceline shares a buy, and his firm hasn't done underwriting for the company.) "I saw someone throwing around a $372 [million] number on Friday, and I knew as soon as I saw that" that there could be some downside, Terry says.

Even though priceline beat expectations, its report confirms that revenue growth simply isn't what it used to be. (TheStreet.com explored the issue of slowing top-line growth, which caused Amazon some trouble last month, in an earlier piece.) While priceline's 12% sequential growth was better than analysts expected, it was no match for the previous year's 112% sequential jump, noted Merrill Lynch analyst Henry Blodget in a research note to clients. The sequential-dollar increase also declined to $38 million from $62 million in the previous first-quarter/second-quarter period, he said. "We do not believe this can be attributed to 'the law of large numbers,'" he wrote, somewhat ominously. (He rates priceline shares a buy and his firm has done underwriting for the company.)

All Mixed Up

On priceline's conference call there was also some scrutiny of the company's revenue mix. Some 6.5% of revenue came from fees -- straightforward commissions on rental car and hotel transactions -- down from 8.5% last quarter. Fee-based sales contrast to transaction-based sales, such as the money priceline gets from handling airline reservations. priceline has said its goal is to eventually derive 20% of sales from fees, which are more predictable and offer a better margin than transaction sales. The company said the path won't be linear, since products using both revenue structures will be rolled out over coming quarters. (priceline said it will soon introduce an insurance product, and will also focus on expanding its international and B2B businesses in the third quarter.)

Other than that little blip, though, analysts were hard-pressed to identify a point of weakness in priceline's report. "It just wasn't a blowout," says Anthony Noto, an analyst with Goldman Sachs. (Noto rates priceline a buy, and his firm has done banking for the company.)

That may have the Amazon and eBay folks on the other coast bracing for the release of their own quarterly reports on Tuesday and Wednesday evenings, respectively. Unless they've got a blowout up their sleeves, they may be the next in the market's unforgiving sights.

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