priceline Growing Pricey as Rally Rampages On

A rising tide lifts all boats, the saying goes.

Who Do We Appreciate? priceline's 92% rise over a month

That helps to explain the recent rise in shares of name-your-own-price online travel agent priceline.com (PCLN Quote). Since last fall priceline has sharply scaled back its business and slashed earnings guidance; even in hitting less ambitious targets, its revenue continues to fall from year-ago levels. What's more, the company has offered investors little instruction on what financial results to expect beyond the current quarter.

Yet the stock has surged this week, hitting $7 for the first time in six months, on the heels of better-than-expected earnings and a ratings upgrade by a prominent analyst. Though analysts say the company's fundamentals have changed little in the last six months and the travel business looks as competitive as ever, priceline shares are up over 400% on the year, having nearly doubled during the Nasdaq's best April ever. That leaves the stock precariously expensive, analysts say. priceline was up 41 cents at $7 Wednesday on volume 15 times its daily average.

Good News First

In a statement released Tuesday, the company reported earnings that were slightly better than Wall Street expected, saying it would be profitable for the first time in the second quarter. This news, combined with an upgrade by Goldman Sachs Internet analyst Anthony Noto, pushed the share price up nearly 40% Tuesday from Monday's close. Noto cited improved customer service and a clearer outlook for profits, writing that the first quarter could "potentially" be the company's last unprofitable quarter. (Noto upped his rating to market outperform ahead of the earnings release. His firm has been an underwriter for priceline.)

Down Jacket priceline's retreat since IPO

The company, however, has said no such thing, refusing to give guidance beyond the second quarter, other analysts note. (The second-quarter guidance itself only repeated guidance priceline has already given Wall Street.) Moreover, a push by the major airlines to offer their own low fares could squeeze profit gains at priceline, analysts say. Meanwhile, in highlighting comparisons to a dismal fourth quarter rather than the typically cited year-ago period, priceline obscured the fact that revenue declined 14% from the same period last year, while its loss expanded.

'Silly Season'

So what has changed? Investor psychology, perhaps.

Investors "completely ignored the fact that revenues were down from the prior year," says Eric Von der Porten, a portfolio manager at Leeward Investments, a West Coast hedge fund. "It does seem like we are getting back into silly season." Von der Porten holds no positions in priceline, but was short the stock earlier this year.

Another buy-side analyst whose firm doesn't have a position in the stock says, "Nothing has changed. Their business is not growing."

The Norwalk, Conn.-based company, once an Internet darling, watched its share price climb to the $150 range before collapsing to about a buck late last year. The company reported fourth-quarter earnings in February that showed a loss more than twice as large as analysts expected. This came after a pair of shocks -- an earnings warning in September and a key executive departure in November -- that hammered the stock, sending it into the single digits.

Growing Pains

While the company has quelled concerns about its survival, that alone is hardly enough to justify the recent share price, say many analysts. Mark Rowen of Prudential Securities, for example, headlined a report released Wednesday: "First-quarter results reflect an improved outlook, but recent run-up in stock fully reflects it." Rowen kept his hold rating, upping his 12-month target price from $3 to $5 -- about $2 below the recent share price. (Prudential hasn't done banking for priceline.)

Rowen questioned how much priceline's business can grow, especially in light of an increase in fare sales by major airlines. "Following the well-publicized decline in airline revenue and profits this past quarter," he wrote, "airlines have started to offer lower-priced fares in an effort to fill seats with leisure travelers. ... We believe that these fare sales could negatively affect priceline's second-quarter business as consumers have less need to search for highly restrictive low-cost fares."

Another analyst kept his hold rating, partly because no one can predict with any certainty how much the company can grow its business. Michael Legg, an analyst at Jefferies, notes that at current levels the stock trades at over 50 times the consensus 2002 earnings estimate of 12 cents. But that is no more than Wall Street's best guess; the company has not given guidance that far ahead.

"With limited guidance through the end of 2001 and no outlook for 2002 relayed by management, we consider the recent stock price updraft highly premature," Legg wrote in a report published Wednesday. (His firm has not done underwriting for the company.)

Ultimately, investors must remember that even a floating boat can still take on water.