Priceline: Strong Growth, But That Doesn't Look Sustainable

Includes: EXPE, PCLN
by: Hilary Kramer

When (NASDAQ:PCLN) first made it to the scene, the model seemed genius. The best of all was William Shatner advertising the service. We all love Captain Kirk.

The online travel agency told consumers “name your price” for airfare, hotel or a rental car, and if they could match your price, you got it. And suppliers of travel services had a chance to unload product by providing it at a deep discount. In 2003, Priceline expanded its services to also offer more traditionally priced travel products, whose price was disclosed up front.

I’ve personally never been a big fan of Priceline’s airline services, but maybe that is just me. I don’t like to be locked into a travel route simply because it is priced at a level I think fair. But for travelers on a budget who don’t need to get somewhere at a specific time, the company has been a hit. I do absolutely use Priceline all the time for hotels. That is an amazing program. I always end up with a hotel better than I expected. I was checking in at the Park Hyatt in San Francisco and this man ahead of me told the front desk "I have the special discounted $350 Microsoft rate." I said "...and I have the special Priceline $65 rate."

On paper, Priceline today doesn’t look bad. Management is strong. Last quarter showed a 63% improvement in bookings over last year, and an impressive 117% growth in Europe. Gross profits were up 62%, to $106 million. The problem with Priceline in my mind is not its model – it is a clever one – but the replicability of its model. It is easy to rip off Priceline’s online business, and others have jumped on the bandwagon. Much larger sized competitors like Expedia (NASDAQ:EXPE) and Travelocity are capturing Priceline’s customers, most of whom are happy to go anywhere on the web so long as it delivers them the bargain they are seeking.

What’s more, airlines and hotels and car rental agencies are now able to offer products and deals directly to consumers, eating into Priceline’s market. And the lower fares offered by travel services across the board have made the Name Your Own Price format less appealing. Why be locked into a travel plan simply for a bargain, when you can get the same bargain and the choice of how to travel without Priceline.

Type of stock:
A small growth online retailer who once had a unique model that now is feeling the heat of competition and lowered travel prices directly from suppliers.

Price target: Now trading in the low $31 range, I would not recommend Priceline at this level. While it is showing strong financials at this time, it is hard to imagine how it will continue to grow in the face of stiff competition and market obstacles. The one caveat: should Priceline get acquired by a bigger fish, you could see a nice return on your investment. Of course, that is, if you bought Pricleline for $8 rather than its once $100 (as I did!-- but we can't win them all!). I have made up for my loss in stock price with the savings on the service.

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