CNET también está disponible en español.

Ir a español

Don't show this again

Priceline must take the next step

The auction site for travel has done a great job of rebuilding. Now Priceline has to expand to stay ahead of the pack.

Priceline.com has done a great job of rebuilding. Now, analysts say, it has to expand.

Travel Web sites have thrived this year, demonstrated in high stock prices and favorable financial results. Travelocity.com, Expedia.com and Priceline all recently posted quarterly sales and earnings ahead of increased expectations.

Credit Priceline for winning a clean bill of health after looking like the corporate equivalent of an emergency room patient just seven months ago.

The company reported a second-quarter pro forma profit of $11.7 million, or 5 cents a share, far greater than First Call's earnings prediction of a penny per share. And, for the first time ever, Priceline reported a profit of a penny a share including charges. Sales of $364.8 million topped the consensus forecast by 21 percent.

Meanwhile, Priceline also raised its outlook for the third quarter, projecting pro forma profits between 5 cents and 7 cents a share on sales of $341 million. According to First Call, Priceline was expected to post a profit of 3 cents a share for the third quarter.

Priceline kept its profit margins relatively healthy even as it claimed market share gains in its hotel and rental-car reservations businesses, which have lower margins than its airline tickets business.

And the airline business kept growing despite more competition--not only from Web sites such as Hotwire and Orbitz, but also from established companies Expedia and Travelocity, which have new auction-style services.

Most observers expected Priceline to post a strong second quarter. "Continue to expect significant upside from Priceline," Goldman Sachs analyst Anthony Noto wrote ahead of Priceline.com's report this week.

But other observers wonder if the company can keep it up long enough to justify its $1.7 billion market capitalization. "That's really my question: What's the growth going forward?" Jefferies analyst Michael Legg said Tuesday.

Despite Priceline's recent successes, sales are still so unpredictable that executives haven't offered a forecast for the fourth quarter of this year, let alone for future quarters.

The same can be said of many other technology and Internet companies--but many companies already have the uncertainty factored into their share prices. Priceline shares, on the other hand, have risen about eightfold since Dec. 20.

Skepticism in the air
Analyst Jake Fuller of Thomas Weisel Partners--the latest analyst to start covering Priceline--believes the company has to increase earnings 49 percent annually for the next 10 years to justify its current stock price.

At Tuesday's closing price of $8.87, Priceline is valued at more than 60 times First Call's 2002 earnings forecast.

Fuller isn't alone in his skepticism. Though many Priceline analysts believe the company has done a very good job over the last two quarters, seven of 11 research firms following Priceline still maintained the equivalent of a "hold" rating on the stock ahead of the company's second-quarter report.

On Wednesday, Prudential Securities analyst Mark Rowen maintained his "hold" rating, adding he was "cautious about the ultimate size of Priceline's highly restrictive air travel product market."

Rowen said the economic slowdown has helped put Priceline in the "sweet spot" of the travel industry and it may not last once the economy recovers.

"While it appears Priceline has been making headway to achieving profitability, we remain concerned regarding the ultimate potential of Priceline's narrower platform," Bernstein analyst Faye Landes said this week.

As Hotwire and Orbitz become established and as individual airlines push their own discounts, Priceline.com could have a hard time maintaining growth, Landes said.

Company executives dismissed those concerns during Tuesday's conference call with analysts. CEO Richard Braddock maintained that Priceline's fastest-growing businesses aren't airline reservations but hotel and car reservations. And despite Priceline.com's well-publicized failure in the grocery and other nontravel markets, the company still believes it can eventually use its auction model in businesses outside of travel.

"We certainly feel that we have a business platform here that has leverage over time," Braddock said.

One can only hope. Wrote Thomas Weisel's Fuller: "Investors must be hoping that the company's potential in the travel business is significantly larger than we project, or that the company is able to extend into other businesses."

So Priceline has shown it can make money on airline tickets and hotel rooms. But it needs to move beyond these arenas to continue growing.

"Can they sustain growth? I hope they can," Legg said. "Am I willing to pay for that chance? Not yet."

Close
Drag
Autoplay: ON Autoplay: OFF