priceline Investors Head for Exits as Novelty Wears Off

Updated from 1:35 p.m. EDT.

Is the novelty of priceline.com (PCLN) wearing off?

Haircut priceline over two days

That was the fear behind Wednesday's massive selloff in priceline shares, which followed the company's announcement that its third-quarter revenue will fall below analysts' expectations due to weakness in its main airline ticket business. In late trading, the stock was down $8.13, or 44%, at $10.50.

priceline forecast revenue of between $340 million and $345 million, not the $360 million to $380 million anticipated by analysts. The company said a $20 million to $25 million shortfall in September airline ticket revenue -- springing from a lower average offer price and a lower number of accepted offers -- was almost entirely responsible for the sales disappointment. Airline-imposed fuel surcharges, flight cancellations and the airlines' own sale fares were the culprits, priceline said. Net loss in the third quarter before items will probably be the same as the second quarter's loss of a penny per share.

"This is less about customer demand and more about average revenue per order," said priceline President and CEO Dan Schulman on a conference call with investors and the media.

Won't Be Home Again

But just maybe, skeptics are saying, there's something more at work here than a one-time blip in airline industry economics. Faye Landes, an analyst with Sanford Bernstein, initiated coverage last month with a market perform rating (like a hold), asking the prescient question: "Is ticket supply leaving on a jet plane?"

In September, at least, it did. There's no shortage of Web sites offering airline tickets, including Lowestfare.com, Cheap Tickets(CTIX), Travelocity (TVLY) and Expedia (EXPE).

Divided We Fall Tracking Amazon, priceline shares' retreat

Source: BigCharts

And major carriers like AMR's (AMR) American Airlines, Continental Airlines (CAL), Northwest Airlines (NWAC), US Airways (U), America West Airlines (AWA) and UAL's (UAL) United Airlines are getting into the game themselves, planning to launch Hotwire.com, which will offer discounted tickets.

"Airlines is their killer app, and it's a tough business," Landes said today. "If [competition] is a problem now, it's going to be a problem a year from now. It isn't going to go away." (Her firm hasn't done any underwriting for priceline.) And with the warrants that priceline uses to attract airlines worthless at these stock price levels, there's little incentive for them to fork over extra ticket supply, notes Mark Roberts, analyst with the boutique research firm Off Wall Street Consulting Group, another skeptic who's probably got a bit of a spring in his step today. Roberts recommended selling priceline shares in June 1999, when the stock traded at $110. (priceline spokesman Brian Ek says the problems experienced in September weren't directly associated with increased competition.)

Break Out

priceline is on its way to making itself a "major consumer brand and as a broad horizontal e-commerce platform," said Schulman in a press release. But the company doesn't break out how individual businesses like long-distance phone service and mortgages are doing. (Schulman did say on the conference call that third-quarter revenue from nonairline businesses would likely rise 20% from the second quarter.) "There's no real next rock to jump to," says Roberts. "Besides airlines, what's the next great business?"

Stocks like Autobytel (ABTL) and eLoan (EELN) have been thumped, he says, while other travel sites with more ticket volume are trading at multiples lower than priceline's.

"If revenue growth in their core business is slowing, what does that mean in terms of getting traction in other categories?" wonders Tom Courtney, an analyst with Banc of America Securities. "It's rare to be much more successful in an add-on category than the original one." Courtney recently started coverage on priceline with a market perform, asserting that customers don't come back often enough or buy at prices that let priceline make a whole lot of money on transactions. (His firm hasn't done underwriting for priceline.) Ek disagrees, saying that priceline had a repeat rate of 39% in the second quarter. And that figure doesn't include groceries and gasoline, high-repetition businesses sold through the separate, privately-funded Priceline WebHouse Club.

And then there are more visceral analyses. "If you use their product, you get great prices, but it's a pain in the [posterior]," says one priceline short who had covered most -- but not all -- of his position before today's announcement. "It comes down to how much do you value your time. Whether you're buying groceries or trying to book a family vacation, it's great to have this type of structure if you're totally flexible and if price is the only thing you care about. But at the end of the day, it's cumbersome." The short thinks priceline fills a valuable niche, but will never be as big as its valuation once suggested. Again, priceline's Ek disagrees. "There's nothing about it that's a pain to use," he says. "In actuality, a service such as ours is getting easier to use," as price transparency increases, he says. "If you're saving hundreds of dollars on airline tickets, it's worth a little bit of homework."

Investors today weren't buying that. Either it was that, or they weren't pleased by Schulman's statement that forecasting short-term revenue remains "difficult." Sequential revenue growth won't begin until the spring, he said. But the spring, it seems, is too long to wait for a recovery -- if one indeed comes.

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