Wit Issues a Buy on priceline, Before the Stock Trades

The company's push into research is key to defining itself as a 'real firm,' experts say.
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Online investment bank

Wit Capital

pushed further into traditional Wall Street territory Tuesday by publishing its first research report, issuing a buy rating on

priceline.com

(PCLN:Nasdaq) about three hours before the company started trading.

The report, written by Jonathan Cohen, Wit's director of research, and Ryan Alexander, a vice president, says priceline "is positioned to fundamentally change the existing model for online commerce."

Reuters

picked up the report at 9:01 a.m. EST.

priceline, which lets online customers name their own prices for airline tickets, hotel rooms, automobiles and even home mortgages, was priced at 16 Monday night by lead underwriter

Morgan Stanley Dean Witter

(MWD)

. Its shares opened at 81 at 12:30 p.m. and later closed at 69, a 331% move.

Wit's new coverage effort was almost as noteworthy.

First-day research reports, especially those issued even before trading starts, are rare, says Peony Kao, a research analyst for

Renaissance Capital

. Investment banks that are part of the underwriting team for an IPO are prohibited from issuing recommendations or reports on the stock for 30 days.

Even though there are no restrictions on companies not involved in the underwriting (Wit had no role in the priceline offering), most investment banks stick to the waiting period anyway to avoid the appearance of pumping up a stock, Kao explains. "People see

a research report going across the ticker with a buy recommendation, and it can affect them if they are not very seasoned investors," she says.

Last September, Morgan Stanley's high-profile Net analyst Mary Meeker reportedly caused a stir when she broke with tradition and issued a research report on

eBay

(EBAY) - Get Report

even before its shares started trading. Morgan Stanley wasn't involved in the underwriting of eBay.

A Wit spokeswoman declined to comment because the firm is in its quiet period for its own IPO.

Regardless of the timing, Wit's push into research is a key part of its strategy.

"That's what they have to do to be a real firm," says Sandy Robertson, former head of

Robertson Stephens

investment bank. "They have to be out there and be a spokesman on a stock." If Wit Capital's ultimate plan is to become a full-service firm, and possibly even lead IPO underwriter, then research is essential to support a stock, Robertson says.

So far, Wit has stuck to taking pieces of offerings, 5% to 10%. It then distributes them to investors online. Many companies like the concept because it gives them access to an accepting market: tech-savvy online investors. On Monday,

Goldman Sachs

took a

22% stake in Wit, giving the online investment bank a major boost in terms of the respect it can garner on the Street.

In an email to its members, Wit noted one difference between its research and reports offered by most traditional firms: "In contrast with Wall Street firms' traditional practice, and in keeping with Wit Capital's democratic philosophy, we plan to make our research freely available through our Web site and those of our partners."

Wit's report predicts priceline's revenue will grow 15-fold, to $560 million in 2001 from the company's reported $35.2 million in 1998. Although stopping short of forecasting positive earnings, the report says losses will decrease from $1.41 per share in 1998 to 4 cents per share in 2001.

"Our preliminary (and admittedly broad) valuation construct of $5 to $7 billion translates into a per share range of $35 to $50 (although we believe that the shares could trade above that range after the pricing of the transaction)," the report states.

At Tuesday's close, priceline's market valuation of $10 billion was already above that prediction.