Big-name investors caught in Priceline downdraft

Priceline, which allows customers to place bids on products ranging from gasoline to hotel rooms, warned today that third-quarter revenue will fall short of analyst expectations. Investors reacted by applying the name-your-price philosophy to the shares. In midday trading, investors were bidding $10.75 for a share, about $8 less than yesterday.

Priceline's woes spilled over to other e-commerce stocks. Amazon.com fell $1.88 to $37.88; eBay dropped $7.19, or 10 percent, to $63.50; and Yahoo dived $12.06 to $90.38.

Priceline's 40 percent plunge put an exclamation point on a year-long slide in the stock--a persistent decline that paused only briefly as the company trumpeted new products and big-name believers. The shares are down 90 percent from their 52-week high of $104.25--despite having received a vote of confidence in the form of a combined $240 million stock purchase by Allen, Malone and Alwaleed in the past two months.

Allen, Microsoft's billionaire co-founder who runs Vulcan Ventures, and Malone, head of Liberty Media, bought $190 million of Priceline stock less than two months ago. Alwaleed weighed in with a $50 million purchase earlier this month. The moves were widely hailed as a vote of confidence in the company and briefly buoyed the shares.

Many consumers are familiar with Priceline because of a high-profile ad campaign featuring William Shatner, aka Capt. James T. Kirk of the "Star Trek" TV show. Unfortunately, not enough of the people watching the ads have been using Priceline's service recently.

In its warning, the Norwalk, Conn.-based company said it expects third-quarter revenue of $340 million to $345 million, while analysts have forecast $360 million to $380 million.

Priceline said the shortfall was caused by slowing airline ticket sales, which comprise 87 percent of its revenues. The company also said revenues from ticket sales would be off by $20 million to $25 million in the third quarter from the second quarter. It said non-airline revenues would be up about 20 percent.

In the wake of the revenue warning, several analysts issued pessimistic reports.

Jefferies & Co. analyst Michael F. Legg downgraded the shares to "hold" from "buy." "While we remain long-term believers in the market opportunity available, we believe this preannouncement, coupled with recent negative press regarding customer complaints and new competitive offerings on the horizon, will continue to place near-term pressure on the stock," Legg wrote.

Merrill Lynch's Henry Blodget cut his rating on Priceline to "neutral" from "accumulate," citing the importance of airline ticket sales to the company. In addition to airline tickets, Priceline sells hotel reservations, car rentals and home mortgages.

"While we still believe the model is compelling long term, the business continues to be heavily dependent on airline ticket sales," Blodget wrote. "As a result, it appears management has limited visibility to accurately forecast the business."

Tim Albright, financial analyst at Salomon Smith Barney, attributed much of Priceline's revenue problems to a fuel surcharge that airlines imposed recently to compensate for rising fuel costs. Not only did the surcharge raise ticket costs and decrease sales, it added to Priceline's costs in buying tickets, he said.

One such problem is that small changes in Priceline's businesses--such as a fuel surcharge--can significantly affect the company's business. The other problem is that while the company has tried to apply its "name-your-price" strategy to everything from home financing to long-distance rates, it remains overly reliant on selling airline tickets and hotel rooms.

"The key for Priceline is to build up its portfolio business," Albright said. "That's always been the key. Right now it's still a travel business."

Fuel surcharges and a reliance on ticket sales are not the company's only concerns.

Today's debacle follows a scathing report on the TV show "48 Hours" last week that noted Shatner has never used Priceline to buy discounted tickets and explored dozens of customer complaints about the site.

In addition, the Wall Street Journal recently reported that the Better Business Bureau removed the company because of repeated complaints.

While it faces some unique challenges, Priceline's dismal stock performance this year mirrors that of many other Internet companies that saw shares plunge last April and have since continued to glide into the teens or even lower. Inexperienced investors are not the only ones who have felt the pain; some of savviest bargain hunters have also been hurt by the relentless slump.

Allen's investment came through Vulcan Ventures and Malone's via Liberty Media. Allen is best known as a Microsoft co-founder who now invests his billions of dollars in everything from Net start-ups to the Portland Trailblazers basketball team, while Liberty Media is a cable TV programming company run by Malone.

Under terms of the investment, the companies bought 8 million shares for $23.75 each from Priceline founder Jay Walker for $190 million. Liberty and Vulcan were prohibited from claiming their Priceline shares until Aug. 1, 2001, and no later than Aug. 1, 2002.

In turn, Liberty Media and Vulcan Ventures received options from Walker to acquire an equity interest in Walker Digital, also a Walker-founded company that develops and patents Internet business methods and services.

Earlier this month, Saudi businessman Prince Alwaleed bin Talal bin AbdulAziz Alsaud, chairman of Kingdom Holding Company, invested $50 million when he acquired the shares for $25. For their stakes, Allen and Malone paid about $23.75 per share.

It's still too early, however, to call the investments a bust. Allen and several other investors purchased a $55 million stake in the company about four months prior to its March 1999 initial public offering.

News.com's Stefanie Olsen and Troy Wolverton contributed to this report.