It's rare that a small-cap stock sports one of the most recognizable brands in the country. Then again, Priceline.com (Nasdaq: PCLN) has always been something of an oddity.
The company sells travel services in the form of airline and cruise tickets, hotel rooms, car rentals, and vacation packages. But far from being a "traditional" online travel agent, it forces its customers to go through the "Name Your Own Price" rigmarole. When buying airline tickets, for example, users select their destination and travel dates, and then type in the price they're willing to pay. In less than 15 minutes, Priceline lets them know if their price has been accepted and, if so, which airline they'll be using and what time they'll be flying.
Name your own enigma
Whenever I look closely at this business, I feel like I'm stumbling through a carnival funhouse, never quite sure about what I'm seeing.
Take its third-quarter earnings report. (Please.) Revenue was down 21% from the same period last year, and losses steepened from $0.03 a share to $0.11. Chairman and co-CEO Richard Braddock told The Wall Street Journal the quarter was disappointing. "With the airlines continuing to price below the market," he said, "the service we can offer to customers remains substandard."
(Now there's a ringing endorsement, eh? On the one hand, Braddock must be applauded for his honesty at a time some of his fellow CEOs are being fitted for orange prison suits. On the other hand, Priceline investors probably wish he would follow every mother's advice: "If you don't have something nice to say...")
What Braddock means is that Priceline's perceived advantage -- lower fares -- is eroded when the airlines themselves are offering deep discounts. The numbers back him up: During the quarter, the company sold 46% fewer airline tickets than a year ago. Sales will likely dip even lower in the fourth quarter. As business contracts, it's being forced to lay off 15% of its staff, or about 65 employees.
And all of this in an industry -- online travel -- that's absolutely booming. Expedia (Nasdaq: EXPE), for example, just reported revenue and profit figures that doubled last year's totals. More Americans are going online than ever before; Forrester Research (Nasdaq: FORR) says six in 10 U.S. households now surf the Web while researching their trips.
Looking at its declining numbers from this angle, then, Priceline seems rather insignificant.
On the bright side
But before we toss it aside as casually as Jennifer Lopez ditches husbands (watch out, Ben Affleck), consider this: Despite the reported losses, Priceline is profitable where it counts, having generated nearly $16 million of free cash flow over the past year. It expects to start earning money again on a GAAP basis in the second quarter of 2003, and has about $150 million in cash and equivalents stored away. It carries no debt.
As revenue from airline travel becomes less and less dependable, management has deftly maneuvered to concentrate on other aspects of the business. "Given the protracted nature of the airline industry's difficulties," said Braddock, "we will continue to focus our resources on our hotel and vacation package businesses and on making discounted retail fares available to our customers through Lowestfare.com." Priceline acquired Lowestfare's domain name and trademarks earlier this year and plans to offer traditional pricing through the site soon. This, management hopes, will allow it to retain customers who might otherwise go elsewhere after having their low price bid rejected.
A visit to Priceline's website shows just how much the emphasis has shifted away from air travel; bold lettering across the top proclaims "The Best Hotels, The Best Prices!" And while airline business is falling off, hotel bookings grew 37% from the prior year.
Seeing as how the company is making money and has a decent cash cushion, it's in no danger of shriveling up and blowing away anytime soon.
However...
One of our main goals in researching small-cap stocks is to find fast growers with bright futures. Not only is Priceline not a fast grower, the declining numbers show it's not a grower at all. The only reason it's a small cap in the first place (market cap: $340 million) is because it descended there from large-cap land. The stock price plummeted from $95 a share to $1.28 in just nine brutal months in 2000. In the last two years, it almost reached $10, but has now fallen back again to $1.50.
What about the future? Unfortunately, I think the very thing that sets Priceline apart is also its biggest hindrance to becoming a major force: the "Name Your Own Price" format. It's too unpredictable for the majority of travelers to become comfortable with it.
When bidding on airline tickets, users can only set their dates of departure and return; their flight might leave anytime between 6 a.m. and 10 p.m., it could be with any of a number of carriers, and there are no frequent flyer miles awarded. What's more, once the transaction is completed there are no refunds.
It's much the same with lodging reservations. Travelers can specify a certain area of a city and a "class" of service (1- to 5-star), but have no other control over which hotel they'll be staying in. If they're not happy with the choice, there are limitations on changes and cancellations. It's sort of like a blind date; things might turn out just fine, or they might not.
Sure, these may be acceptable tradeoffs for many people. But Priceline's sales are only a fraction of the major players in the industry, suggesting that the vast majority of travelers simply don't want to be bothered with the inconveniences inherent in the system.
Surprises are just fine in a funhouse, but when spending good money on airline tickets or hotels, most people want a little more control over their experience.
Rex Moore is still waiting for a Green Acres reunion show. His stock holdings can be found on the bulletin board at the Hooterville Post Office, and on his profile page. The Fool has a disclosure policy that even Arnold Ziffel would love.
