Dueling Fools
July 21, 1999

What's My Priceline?
The Bull Rebuttal

by Paul Larson ([email protected])

Ithink the first thing that struck me after writing my case for Priceline and reading Rick's bearish angle was the fact that I spoke in broad conceptual turns where my fellow Fool focused on some specific perceived shortcomings of the company. In other words, I'm not sure if my associate isn't suffering from a bit of myopia and not seeing the big picture.

Either way, let's look at some of the bearish points. Rick pointed to the company's gross and net margins, which are around 10% for gross and negative for net at the moment. Even if the company doesn't boost its gross margin down the road (I think it will), it's a fairly safe bet that the overhead expenses are going to grow at a fraction of the company's sales growth. So while net margins are currently negative, they will continue to improve over time. In fact, if you look at what has happened over the past few quarters, the margin improvement is readily evident. In the just completed quarter, net margins had improved to minus 12.8% from minus 34.8% just one quarter prior and from over minus 300% for all of 1998. See the trend?

Rick then brought up the point that the company is not expected to be profitable for the next two years. This is true. But what about three years from now? Or five years? It's a completely different story then. If current trends in sales growth and margin remain in place, most models I've seen show Priceline coming profitable sometime in 2002, or perhaps even sooner.

The bearish argument then points to the cash that is being used to build the business, and that the company is going back to the well a second time. With the stock being such a strong performer on Wall Street, why not sell a few more shares? The company will be netting somewhere near $450 million ($200 million from the stock sale, the rest from debt) and diluting its sharecount less than 2% in the process.

By using its strong equity currency, Priceline is merely gathering ammunition to defend its unique market-leading position. Even if a competitor were to pop up on the radar (there are none at the moment), Priceline will have both the first-mover advantage as well as the financial wherewithal to sustain its marketshare. I'm excited to see what Priceline will be able to do with this extra fertilizer to grow its business.

Then Rick points to the fact that only about 13% of the current bids placed on the site are actually filled. I think it's worth noting that last summer the fulfillment rate was only about 7%, while in the first two months of 1999 the number was up to 12%. See the trend here, too? The company is now selling about 6,000 airline tickets a day, and the growth is vibrant. It's also worth it to mention that for "reasonable" offers (ones where the discount was less than 30%) the company was actually able to fill nearly 24% of its orders in the first quarter.

Rick then asks the question of what's keeping Priceline's competitors at bay. That one's easy -- the patent. And even if the patent were to be nullified down the road (unlikely), Priceline was the first mover and has such an overwhelming market share that it would take someone crazy and with very deep pockets to go up against the lone Goliath in the industry. The company's extremely strong brand would help, too.

To make a long story short, don't look at where Priceline was yesterday. Be a Fool and look at where it is headed tomorrow.

Next: The Bear Responds