--Stock falls 16% after weak quarterly revenue, dire outlook
--Deceleration raises worries Priceline's high-flying growth put it on a plateau
--Slowing growth could also be short-term as Europe economy pressures a key area of its business
By Joan E. Solsman
Priceline.com Inc. (PCLN) shares plunged Wednesday, losing more than $100 each as investors questioned whether its slowing growth was a mere lull or the first sign of an inevitable plateau.
Despite a 37% increase in earnings, Priceline's bookings and revenue growth decelerated more than expected in the second quarter. More importantly, it warned that slowing in its European business, which represents 60% of the hotel room nights it books, was sure to continue as economic uncertainty increasing grips travelers' sentiment.
Shares in the online travel agency--which operates its namesake website as well as Booking.com, Agoda.com and Rentalcars.com--sank 16% to $572.95 in recent trade, pulling down other online travel names with it. Expedia Inc. (EXPE) was down 2.7% at $57.26 and TripAdvisor Inc. (TRIP) fell 4.2% to $37.02.
Orbitz Worldwide Inc. (OWW) stock slumped 19% to $3.78 as it reported a second-quarter disappointment of its own, confirming the European pressures aren't solely a Priceline problem. Chief Executive Barney Harford said global economic uncertainty intensified during the second quarter and continued into the third, resulting in the company's lowered sales outlook for the year.
Also weighing on investors minds is the prospect that competition from Expedia is ramping up. Priceline domestic bookings underperformed Expedia's for the second straight quarter. Chief Executive Jeffery H. Boyd,, on a conference call Tuesday to discuss results, conceded rivals' better results in the last couple of quarters reflected good execution on their part. But he added it showed the substantial opportunity in the market, that two businesses of their size can post impressive growth.
Despite Priceline shares' sudden loss of $100 each Wednesday, the stock remains up 24% so far this year. The stock has nearly doubled in the last two years and has surged more than seven-fold in the last five.
Stifel Nicolaus analyst George I. Askew, downgrading Priceline to hold, predicted Priceline's valuation multiple should adjust downward, as it transitions to a softer growth story from one of momentum.
"Investors in our view should expect the company to mature and soon lose its momentum patina," he said in a note.
The sharp drop in Priceline's stock brings to mind other Internet names, like Netflix Inc. (NFLX), that has seen high-flying share prices drop precipitously. Netflix stock last year plunged from an all-time high of $304.79 in July to as low as $62.37 less than five months later after a fee increase outraged users and kicked off a wave of subscriber defections.
But Citi Research analyst Mark S. Mahaney didn't expect Priceline valuation to detract from its historical range unless it shows clear losses of market share, which so far isn't evident. "The stock is coming down because the earnings are coming down, but we're not seeing a derating in the multiple," he said.
He also pointed to growth potential elsewhere in the world. The Asia and Latin America travel market combined is just as big as Europe. If Priceline executes well, there's no reason why those regions couldn't be as significant to the company in five years as Europe is now, he said.
Benchmark Co. analyst Daniel L. Kurnos also expected pressures on Priceline's growth were shorter term in nature. He noted that its Booking.com business has only 10% of the room night market in the U.K. and online penetration is still low, which instills confidence more room for growth remains.
"Once economic concerns abate, which could happen in 2013, we should see more reasonable growth results," he said. Benchmark has a buy rating on Priceline and Orbtiz and a hold rating on Expedia.
He also pointed to Priceline's more than 50% unit growth outside Europe in the latest period. It just expanded in South America and a new partnership with Ctrip.com International Ltd. (CTRP) gives it a solid entry in to China, complementary to its other Asia operations. "That opportunity hasn't changed," he said.
Write to Joan E. Solsman at email@example.com
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