Priceline on Sale

Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Wall Street Bears (not to be confused with the Walt Disney Bears) are feasting again, this time on Priceline (NASDAQ: PCLN) after it reported its latest quarterly results.  We've seen these feasting bears before.  Remember when Green Mountain Coffee Roasters (NASDAQ: GMCR) was roasted (puns still aren't funny?) after they reported that some of their patents were set to expire?  Do you remember when Netflix (NASDAQ: NFLX) decided to make Qwikster? (More like, will we ever be able to forget about Qwikster?) What did Priceline do, or not do, to drop like this?

The Drop


Priceline is getting hit mostly because they missed analysts' estimates.  The analyst is the guy who looks at your numbers, looks at what you say in your business plan, and then decides what he thinks you should make.  When investors see that a company didn't live up to "the analysts'" expectations, they spook and run.  Sometimes it is for good reason.  Sometimes it's just plain silly.  In this particuliar incident, analysts expected revenue of $1.35 billion and Priceline brought in $1.33 billion.

Priceline also made mention that they are anticipating problems in Europe with sovereign debt and wondering how much longer the euro will exist as a currency.  I can see why this would frighten investors as a big chunk of Priceline's business takes place in Europe.

Reason or Silliness?


Many may make the mistake of thinking that $700/share is wayyyyy too much money to be paying for a website business.  I've explained before in other articles that stock price is a terrible indicator of value.  What matters is how much money each share is making; we call this "earnings per share" (Did you see that coming?). Earnings per share are reasonable and the P/E ratio was also reasonable at around 30 before the stock fell.  

Here's what I think investors should be focusing on: Revenues are up 20% from last year and net income is up a whopping 43% from last year.  I don't care what business you're in, that's good growth!

Only on Wall Street (or drunk on Bourbon Street) is that kind of growth bad news.  Why is it deemed bad?  Because analysts thought it would be more.  If analysts had predicted revenue of $1.3 billion instead, we may have seen Priceline JUMP 10%.  Oh, the joys of the market.

What about the Europe thing?  Admittedly, that is a concern, and one you'll want to be well aware of before initiating a position in Priceline.  However, allow me to point out that this crisis on the other side of the pond is not new.  This has been going on for a day or two now and Priceline has still managed to grow.  That makes me feel good.

Also helpful as we think about what all this means for Priceline is to consider its little brother Orbitz (NYSE: OWW) and the report it just released.  The news today is reporting that both Priceline and Orbitz are falling because they both missed estimates and they both lowered 3rd quarter guidance.  That sounds really bad.  But then you take a closer look and see that while Priceline's net income is up 43% from last year, Orbitz's net income is down 48%.  Net income was only $4.6 million compared to $8.9 million last year.  As you can see, these aren't two companies going down in flames together.  They are heading in completely opposite directions.

It's Time For...


You may wonder about these analyst guys, but you owe them a thank you card, you know.  They just helped you get a bargain on this stock.  That's the beauty of this situation for buy and hold investors and where we beat out our day trading comrades.  Many day traders will take huge losses from this sell off.  Then we come in and get in at a good price.  

Green Mountain had some bad business news that sparked their sell-off.  Netflix just tripped and fell with a bad business choice.  Both of these companies' sell-offs were to be expected, and probably deserved.  But I see nothing but good news in Priceline's report, and I think this sell-off is unmerited. 

I am bullish on this stock's potential now that it is on sale.  I'm going to make a Caps outperform call on this stock.


thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Netflix and Priceline.com and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Netflix, and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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