There must be some days when Jay Walker is glad his Priceline.com Inc. (Nasdaq: PCLN) holdings are just paper.
Four months ago, Walker's 62.5 million shares of the company he founded were valued at almost $8.2 billion. They're now worth about $3.6 billion -- nothing to complain about, but still, nearly a 60 percent drop in wealth isn't something to smile about either.
Part of the stock price's decline came as the entire Internet sector went through a summer slump, part of it came because Priceline was simply overvalued. Corrections are warranted when a company not expected to generate a penny of profit for the next several quarters is trading at $160 a share. You might even say they're inevitable for a company that's about to see millions of shares available as post-IPO lockup periods expire in each of the next six months.
It's one thing to knock down an overpriced stock. But the downward trend has grown steeper over the last two days, since Microsoft's Expedia travel website unveiled a "Price Matcher" service for hotel rooms; like Priceline, Expedia's new service lets people name their own prices through bidding, rather than pay a flat fee. Since the announcement, Priceline's stock price has lost more than 14 percent.
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Big Bad Bill Gates may spook some people for good reason, but it shouldn't scare Priceline investors at this point. I don't put much faith in Priceline's much-touted business model patent -- Macintosh adherents to this day lament Microsoft's unmatched ability to imitate without breaking intellectual property protections -- but that doesn't matter much when the hotel industry already has a market of $23 billion in excess inventory.
"Even in the worst scenario, where Priceline's patent doesn't hold water, there's enough of a market for more than one player to succeed," says Janney Montgomery Scott analyst Tomas Isakowitz, who yesterday began coverage of Priceline with an "accumulate" rating and a price target of $111 a share.
Priceline also has clear leadership. The company has done well to establish itself as the premier shop for "Name Your Price" buying, while Expedia remains stuck in Microsoft's bland morass of Web offerings. "I'm not sure this Price Matcher will attract new users to Microsoft and steal them from Priceline," Isakowitz says. "Priceline has developed a brand in record time."
As with any company, competition might eventually threaten Priceline. But it won't happen soon, and in any case, remember that hotel rooms are merely a small part of Priceline's overall revenue. The company still gets most of its money from airline tickets, a field where it's much harder to ape Priceline because you need tight relationships with airlines -- and Priceline already has some of the large ones locked up. In the long run, hotel and airlines will be just part of a several auction streams; the company has already moved into cars and mortgages.
"Priceline's demand collection system, coupled with the company's strong brand awareness, can be extended into several business-to-consumer and business-to-business product categories," BancBoston Robertson Stephens analyst Lauren Cooks Levitan wrote last week. "Priceline's successful travel business has distracted investors from the company's many growth opportunities in other markets."
Priceline continues along the same path it was on four months ago, when it was the hottest stock in the land. Users are increasing, revenues are growing rapidly, and margins are improving (though they'll never be great, given the economics of the bidding model) to the point where the company now sees gross margins somewhere in the vicinity of 10 percent.
From a traditional perspective, Priceline will remain overvalued until it starts making a lot of money. But if you're a traditional investor -- and that's not a bad thing to be -- you would never buy Internet stocks in the first place.
Those who do wade into the Internet pit as investors (daytrading is another story) look for market leaders and stick with them. And unless Microsoft starts adding Expedia icons to the next version of the Windows desktop, Priceline is likely to be the king of its niche for awhile.
Market indices were bouncing around indecisively in mid-afternoon. The Nasdaq Composite Index was up 18.90 to 2827.64, the S&P 500 down 9.03 to 1335.12, and the Dow Jones Industrial Average down 50.34 to 10986.00. 22GO>