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Stock Analyst Update

Priceline's Woes Unfairly Punish Other Net Stocks

Most of its problems are company-specific, so don't panic.

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What Happened?
Priceline.com's (PCLN) 40% drop in the wake of an earnings warning sent many other Internet stocks falling in sympathy Wednesday. Yahoo (YHOO), eBay (EBAY), and Travelocity (TVLY) were all down more than 10% for the day, and most other stocks in the sector were down as well.

What It Means for Investors
We think this sell-off is an overreaction and creates an opportunity for investors who want exposure to Internet stocks. The bulk of Priceline's problems are specific to its business model, and have little, if any, effect on these other companies. Yahoo, for example, gets the bulk of its revenue from ad sales, while eBay gets the bulk of its revenue from user fees. Neither is affected by fuel prices or demand for airline tickets, two of the major factors behind Priceline's decline.

If there were a general slowdown in Internet traffic or online spending, this sympathetic decline might be understandable. But Priceline said that more people than ever are visiting its site and bidding on tickets; the problem is that fewer of their lowball bids are being accepted. Priceline has also shot itself in the foot with poor customer service and unfortunate marketing decisions. We think that other Net stocks are due for a bounce once the market realizes how Priceline-specific Wednesday's news really is.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.