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2HRS2GO: Priceline is Blodget&#039s baby, but still too pricey

If we all demonstrated as much faith in each other as Merrill Lynch's Henry Blodget has in Priceline.com Inc. (Nasdaq: PCLN), maybe the world would be a kinder, gentler place.

It's certainly a richer one for those who owned Priceline shares before today, with the stock up 7 percent in mid-afternoon trading. And it's all based on one week's results.



Priceline: Worth $20 billion?



Blodget today issued a report that practically raved about Priceline's revenue potential. The Internet analyst liked what he read in a recent press release that noted more than 30,000 ticket sales for Priceline in the first week of May. That's an average of 4,500 sales daily, a 125 percent boost from the first quarter average, and a 60 percent jump from Blodget's own estimates for the second quarter.

Essentially, Blodget used "math that has us so excited" and calculated that if Priceline -- which has already seen one-day sales of 7,000 -- could average 4,500 ticket sales a day for the entire quarter, it could see revenue of $105 million, more than double its first quarter sales.

"There are few companies in history that have grown from $50 million to more than $100 million sequentially," Blodget writes. "This is why, even at a $20 billion valuation, even with questions about the long-term profitability potential, we want to own Priceline.com."

Not wanting to get carried away, Blodget raised his actual revenue estimates to $66 million, compared to his previous forecast of $60 million for the quarter. He also increased his full year prediction to $300 million from $264.4 million, and next year's estimate to $450 million from $414.6 million. "Based on the company's current trajectory, we believe that even our new estimates could prove conservative," he writes.

Blodget was on target a few months ago with his now-infamous prediction of $400 a share for Amazon.com, in pre-split terms. But predicting a stock price and predicting revenue are two very different things. Besides, anyone can project anything using the right set of numbers.

For instance, do an extrapolation for the bottom line. Priceline.com lost $17.6 million in the first quarter, equivalent to about 35.6 percent of sales. Applying that ratio to Merrill Lynch's revenue estimates yields loss predictions of $23.5 million for the current quarter, $106.9 million for the year, and $160.3 million in 2000. Based on Merrill's own expectations of declining gross margins for Priceline, we believe that even our new loss estimates may prove to be conservative.

We are excited.

Obviously, projecting losses like that stretches the bounds of plausibility. In reality, look for sales and marketing expenses to eventually flatten out -- although not, by managment's own admission, in the short-term -- while growth in other costs slow to a crawl. They usually do once a company has starts to establish itself.

(Although keep in mind that the standard bearer of e-commerce, Blodget favorite Amazon.com, remains as bloody as ever. Amazon's pro forma operating loss equaled 10.4 percent of revenue in the first quarter, not much different from 11.4 percent a year earlier).

But projecting revenue from a week in May has problems of its own, because it rests on the assumption that demand patterns and competitive landscapes won't change. Real life is fluid, particularly on the Internet, where everything happens at hyperspatial speeds.

Priceline's business model, consumer friendly and efficient though it may be, isn't that hard to replicate or bypass entirely. Why shouldn't AMR use its own Travelocity.com website to auction off tickets? What's to stop Microsoft from adding auctions to Expedia, then slapping a "Traveling? Buy here!" icon on the Windows desktop? (Well, maybe another government lawsuit, but given that the overwhelming majority of ticket sales happen offline, it would be hard to argue that Microsoft can exert monopoly leverage in that area).

Travel also happens to be more sensitive to world events than almost any other industry. An airplane accident, terrorist threat, bad weather, even just a slight economic slowdown -- any one of those hurts sales. It'll be a long time before Priceline has the financial muscle to withstand a downturn. And it will happen, it always does in the very cyclical travel industry.

I've said it before, and I'll say it again: I love what Priceline offers to consumers. Nowadays it's my first option when shopping for tickets.

But it's not necessarily the one I end up buying from. And at a market capitalization somewhere around $20 billion, it's way too steep to buy into. Especially on "projected" revenue.

Other issues to consider as the trading week comes to a close:

  • Iridium World Communications Inc.
  • (Nasdaq: IRID) The satellite communications provider has more in common with a Third World country than with a cutting edge technology company. Iridium says it has just one-fifth the customer base called for in its loan agreements. Considering that there aren't even enough phones to go around even if the company did sign up enough customers, you'd have to wonder when Motorola will finally pull the plug on this mess and sell the assets to...

  • Globalstar Telecommunications Ltd.
  • (Nasdaq: GSTRF) Even if the stock is going down today with Iridium, the two companies have little in common. Globalstar seems to be back on track to get its satellite network up and running, and its in much better financial shape.

    The broad technology sector was leading the rest of the market down today. With two hours left in regular trading, the Nasdaq Composite Index was down 51.39 to 2530.61, the S&P 500 had fallen 31.39 to 1336.17, and the Dow Jones Industrial Average had slipped 214.49 to 10892.70. 22GO