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Tuesday, August 10, 1999

Priceline.com, Inc.
(Nasdaq: PCLN)
Phone: 203-705-3000
Website: www.priceline.com
Price (8/9/99): $70


This past April, the Fools who write the Daily Double had an abundance of Internet-related companies that had seen their stock prices double to highlight in that feature. In contrast, this summer finds the list of troubled Internet stocks to be quite lengthy. Priceline.com is far from alone in the online world in seeing its stock cut in half (at least), but it represents one of the largest declines in total value. At this writing, a whopping $14 billion of the company's market capitalization has vaporized since early April.

Priceline.com has had a simply amazing life as a public company. After initially pricing its IPO in the $12-$14 range, Priceline came public on March 29, 1999 at $16 per share. The stock closed its first day of trading above $80 per share, a lofty premium to its IPO price even in the wacky world of Internet stocks. After retreating to $58 per share in mid-April with extreme trading volatility, the stock made an amazing run to a high of $165 per share by the end of the month, giving those buying at the IPO an unbelievable 10-bagger in just one short month.

Unfortunately, it's been pretty much all downhill since those heady days in late April. While the company has since announced earnings that slightly exceeded Wall Street expectations, a secondary offering, and a variety of new business ventures, there has been little concrete news to account for the extensive drop in the share price other than Wall Street's dramatic change of perception towards just about any online-related company. Whatever the reason for the weakness, Priceline has seen its price slashed to a fraction of its not-so-old highs.


Headquartered in Stamford, Connecticut, Priceline.com operates a unique website that allows consumers to "name their price" on a variety of items. Based on the buyer's agreed range of product flexibility and named price, Priceline attempts to find a seller willing to accept the buyer's offer. Roughly one-in-eight purchase offers submitted at the website are accepted, and the acceptance rate dramatically increases the closer to retail price that an offer is made.

Priceline started in April 1998 selling airline tickets under its patented system, but now the company also sells hotel rooms, rental cars, home financing, and is rolling out a new car-buying service. During the second quarter of this year, the company sold roughly 440,000 airline tickets through its site. Priceline is expected to eventually offer its demand collection service for an extremely wide variety of products and services, including person-to-person e-commerce.

On July 19 the company announced its intention to sell an additional 6 million shares to the public, 4 million of which are being sold by company insiders. Priceline also intends to sell $250 million worth of convertible preferred stock in its secondary offering.


Income Statement
12-month net sales: $189.2 million
12-month income: ($135..5 million)
12-month EPS: ($1.43)
Profit Margin: N/A
Market Cap: $9,970.1 million

Balance Sheet
Cash: $142.8 million
Current Assets: $183.5 million
Current Liabilities: $33.5 million
Long-term Debt: None
Shareholders' Equity: $171.3 million

Price-to-earnings: N/A
Price-to-sales: 52.7


One problem plaguing just about all stocks these days is the increase in interest rates. While Priceline.com and other new IPOs tend to be debt-light and cash-heavy, higher interest rates especially hurt these developing companies because their valuations are dependent on expected future cash flows that are many years off. Increasing the rate at which these cash flows are discounted can be especially painful for these stocks. Predicting interest rates is as tough as predicting the market, yet the reason why higher rates hurt these companies is important to keep in mind.

Another factor that investors should keep in mind is that companies with little operating history and huge investor interest are going to be inherently volatile. The volatility helped push Priceline up to nosebleed price levels soon after its IPO, and it is also one of the reasons behind the stock's precipitous decline. As they say, live by the sword, die by the sword.

Probably the largest warning sign that Priceline's price was due to be cut was simple valuation. At its peak, Priceline was valued at more than $23 billion. This for a company that has been operating for only a year, had less than a penny in sales for every dollar of its market capitalization, and has yet to post a single penny in profits. No matter how bright the company's future, a great deal of that enthusiasm was already built into the price.


One thing is certain -- the volatility in Priceline.com does not look to cease anytime soon. With the company's new and unproven ventures into numerous other e-commerce verticals, as well as Wall Street's continued manic-depressive attitude towards online stocks, it's a fairly safe bet that Priceline's price will continue to swing wildly in either direction.

From a long-term investor's viewpoint, Priceline certainly has to warrant further inspection for a variety of reasons. The growth in the company's business has been nothing short of phenomenal, with sequential revenues in the second quarter more than doubling those of the first quarter. Plus, the company has a patented business model that can theoretically be applied to a huge variety of industries.

Looking at the company financially, Priceline has the advantage of being able to dramatically increase margins as its business expands, since the cost of running a website and its database is relatively fixed. In addition, Priceline is based on the Internet, giving it the advantage of having a "light" business model with little cash needed to be spent on things like factories and land. Furthermore, the company carries no physical inventory, which gives it unique cash flow characteristics similar to what Amazon.com (Nasdaq: AMZN) enjoys.

Of course, there are issues that Priceline needs to deal with. Probably the largest is how to deal with users who have not been successful in getting a transaction to their liking. The "fantasy" low-ball bidders can be ignored, but those who put in a reasonable bid and are denied aren't likely to be raving happy customers. On the other hand, those who have successfully used the service tend to be extremely satisfied with their transactions, which is one of the reasons Priceline has quickly become one of the most-recognized names in the world of e-commerce.

Given the recent price weakness, investors with a stomach for volatility should definitely check out Priceline as one of the banner companies of the Internet and e-commerce. Needless to say, there are numerous risks involved (valuation included), and a perusal of the related articles below certainly would give a good snapshot of both the positive and negative attributes of the company.

Related Articles:

-- Dueling Fools: Priceline.com (7/21/99)
-- Fool on the Hill: Pricing Priceline (5/4/99)
-- Fool on the Hill: Even Pricier Priceline (5/3/99)
-- Fool on the Hill: Pricey Priceline (3/31/99)

--Paul Larson

Change the World... work for the Fool.

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