Some people say
days as a dot-com disappointment are coming to an end.
Despite a hot start featuring a 331% jump on its first trading day last March, priceline vastly underperformed its go-go cousins on the Net for 1999. In a year featuring an eye-popping 86% jump in the
Nasdaq Composite Index
, priceline posted a 30% drop from its first-day close, reflecting investor confusion over its strategy.
But that was a century ago. Including Friday's 8% jump, the New Year has seen priceline rise nearly 20% amid a mild selloff in the tech sector, as investors have begun to attach value to what analysts and mutual fund managers call a difficult-to-duplicate, built-for-profit business model. In the wake of last week's
over deepening losses, priceline's profit progress has investors who had given up on the stock taking a second look.
"What they've said to the investment community is that their goal is to reduce net operating losses each quarter until they reach profitability," says Mark Rowen, Internet retail analyst at
who initiated coverage of the stock in December with a strong buy and whose firm hasn't done any underwriting for the company. "So far, they've held to that."
priceline said last week it expects to report narrower-than-estimated losses for 1999's fourth quarter. If it delivers, the period will mark priceline's fourth straight quarter of narrower losses. Gross margins have improved, too: While Rowen initially estimated that priceline's fourth-quarter gross profit margin would come in at 12.5%, the company is now saying it'll be closer to 13.5%, compared to negative 3.9% in a year earlier. At its current rate, analysts estimate priceline will become profitable in 12 to 18 months. (The company had negative cash flow from operating activities of about $16.5 million in the third quarter of 1999, and has enough cash on hand to fund that rate of spending for about three years.)
"I was very skeptical that they could move gross margins as quickly as they have," says Ryan Jacob, manager of
Jacob Internet fund, who passed on the company at its IPO. He now counts it among his top 10 holdings. "I was wrong," Jacob continues. "All the company has done is execute much better than anyone could have expected."
Warp Factor 10
In addition to executing well, priceline has been doing a better job lately of explaining its business. It makes its money by collecting the difference between what it pays its suppliers -- airlines, hotels, grocery manufactures -- and what it charges its customers. Because it knows the lowest price its suppliers will accept up front, it can choose whether to accept a customer's bid or not.
Greg Konezny, an analyst for
U.S. Bancorp Piper Jaffray
who initiated coverage of the stock last week with a strong buy and whose firm hasn't done underwriting for the company, says that in contrast to many traditional e-tailers, priceline is well positioned to bring black to the bottom line.
Unlike booksellers and auctioneers, "there are barriers to entry and competitive factors in this market," Konezny says. "They've got proprietary software, and probably most importantly, they have agreements with sellers, where they essentially are allowing consumers to directly bid with suppliers."
Fire Photon Torpedoes
Branding is looking like an advantage for priceline, too.
, who starred as Captain Kirk in the 1960s cult TV hit
, is featured in a series of endorsements that made priceline the second-most-recognized brand on the Net, behind only Amazon.com. (Shatner is so important to the company that the renewal of his contract spurred a giddy press release, headlined: "William Shatner Agrees to Captain Priceline.com's Ad Campaign Into the Next Millennium.")
"Priceline has crossed over the toughest hump there is on the Internet: establishing significant brand recognition," says Jacob. "They spent a lot of money early on before the
current dot-com clutter, and that's paying off in spades."
Wall Street wasn't always so sure it would. After last spring's IPO euphoria faded, Wall Street types started complaining they didn't understand priceline's name-your-own price business model for airline tickets, hotel rooms and, later, groceries. And even if they did, they often doubted it could be profitable. Its stock got hammered, even as momentum investing carried other dot-coms to the moon. After closing at 162 3/8 in April, the stock hit a 52-week low Dec. 30 in the mid-40s.
Trouble With Tribbles
To be sure, even now priceline is far from a sure thing. The company took a $1.1 billion charge in the fourth quarter to cover costs associated with warrants -- essentially stock options -- it gave its suppliers as incentive to join its ranks. If one includes that charge on priceline's balance sheet, the company's estimated loss for the fourth quarter balloons to an estimated $7.37 per share, from the 8 cent-a-share pro forma loss estimate priceline says it will beat.
Over the first nine months of 1999, it recorded a loss of $142 million on revenue of $313 million. That compares to a loss of $38.5 million on revenue of $16.2 million for the year-earlier period. Those numbers include noncash charges typically ignored by Wall Street analysts.
Richard Braddock, priceline.com's chief executive, says the fourth-quarter warrant charges aren't significant. "It's noncash, it need not be financed and it's nonmaterial, in my opinion," Braddock says. "It's not really reflective of the transaction."
Additionally, 103 million shares are set to come out of lockup on Feb. 7 -- not exactly a plus for a company with a current float, according to Braddock, of just over 50 million shares. But the company has been telling analysts that more than 85% of those shares are owned by senior managers who aren't planning to sell.
After all, buying is so much more fun. Especially when you can buy on the cheap.