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Stock Analyst Update

Priceline Still a Stock to Avoid

Company seems destined to be a niche player, at best.

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What Happened?
Name-your-own-price e-tailer Priceline.com (PCLN) reported fourth-quarter results Thursday that were considerably worse than expectations. The company's fourth-quarter revenue of $228 million was 33% below its third-quarter revenue of $341 million, and its pro forma net loss of $0.15 a share was more than twice as much as the consensus First Call estimate of $0.07. Including various restructuring charges, Priceline's net loss for the quarter was $0.62 a share. Despite the poor fourth-quarter earnings, the company said it plans to cut costs enough to achieve pro forma operating profitability by the second quarter of this year, and also announced a $50 million investment by its Asian partner that will give it enough cash to reach that goal.

What It Means for Investors
We continue to think investors should avoid Priceline's stock. While we're encouraged by the moves Priceline has made to restore its reputation and get costs under control, we want to see more concrete results before we're confident of its ability to turn itself around financially. The company admitted that its revenue would remain weak over the next two quarters, but said it will achieve its profitability goal by slashing annual operating expenses by $35 million. But given how badly Priceline has burned investors in the past six months, we'll believe those cost cuts only when we see them.

Even if Priceline does manage to stop guzzling cash, another major issue is how big it can become. Although the company once had visions of applying its name-your-own-price model to everything under the sun, its attempts to do so have failed miserably for everything except airline tickets, hotel rooms, and rental cars. Priceline has now abandoned plans to expand into other areas, making it essentially a glorified online travel agency. But with competitors Travelocity (TVLY) and Expedia (EXPE) exceeding growth and profit expectations, and airline-owned discount travel sites such as Orbitz and Hotwire looming on the horizon, the growth potential of Priceline's core business is more uncertain than ever. We think that Priceline can probably survive in some form, but only as a niche player in online travel rather than the e-tail behemoth it once wanted to be.

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