Priceline.com shares tumbled 6 1/8, or 15 percent, to 34 1/16 Thursday on news that six major airlines are investing in their own Web site, called Hotwire.com, to offer discounted airfare to online travelers.
Based in San Francisco, Hotwire.com has 50 employees and $75 million in initial financing led by majority investor Texas Pacific Group. Several airlines, including US Airways, Continental Airlines and America West Airlines hold minority stakes in the start-up.
Unlike Priceline.com (Nasdaq: PCLN), which lets customers name their own price, Hotwire.com will allow customers to pick from pre-set discounted prices.
Despite Thursday's sell-off, analysts have differing opinions on how this new competitor, set to debut in the fall, will impact Priceline.com.
Janney Montgomery Scott's Isakowitz Tomas cut the stock from a "buy" recommendation to "accumulate" Thursday, citing valuation concerns as well as the impending competition from Hotwire.com.
"The downgrade mostly has to do with valuation," Tomas said. "Hotwire.com means a little more competition and a little more risk, too."
Merrill Lynch's Henry Blodget wasn't quite as concerned.
"Such a service could potentially be a more potent competitor than online travel agencies and the other airline consortium…," Blodget said in a research note. "For several reasons, however, we believe today's drop in PCLN is an over-reaction."
Blodget went on to say that other companies, such as Expedia (Nasdaq: EXPE), have announced plans but have yet to realize the growth and popularity that Priceline.com enjoys. Priceline also competes with Cheap Tickets (Nasdaq: CTIX) and Travelocity (Nasdaq: TVLY).
He also estimates major airlines have roughly 700,000 empty seats a day with Priceline.com selling about 20,000 seats on a good day. The point here is there's plenty of room for competition and, of course, the airlines will still use Priceline.com to unload what they call "distressed inventory."
While Priceline.com derives most of its business from online airfare sales, it's recently expanded into new cars, rental cars, hotel rooms, home mortgages, long-distance telephone service, gasoline and groceries.
"In a year or so, we expect that less than half of Priceline's gross profit will come from airline tickets," Blodget said.
In its latest quarter, Priceline.com beat Street estimates but still lost $7.3 million, or 4 cents a share, on sales of $313.8 million.
First Call Corp. consensus expects it to lose 3 cents a share in its second quarter and 10 cents a share in the fiscal year.
However, analysts aren't expecting the stellar sales growth to continue in the next couple of quarters.
"Because Priceline is still such a highly seasonal business, we would caution against extrapolating 1Q's spectacular performance for the rest of the year (we made this mistake last year)," Blodget said. "However, the business appears to be firing on all cylinders, and we remain positive on the stock."
The stock's been pounded with the rest of the Internet sector so far this year.
After peaking at 119 last June, the stock plummeted to a 52-week low of 33 1/16 in May.
Eighteen of the 19 analysts following the stock rate it either a "buy" or "strong buy."