Priceline's Long Trip from Dot-Com Disaster to E-Commerce High Flier

F. Scott Fitzgerald's famous observation that there are no second acts in American lives seems especially true for the dot-coms that rose and fell during the bubble years of the late 1990s. But there has been at least one notable exception to that rule: Priceline (PCLN).

In 1999, following a much-hyped IPO, the online travel site's stock surged to absurd heights before the company had earned a cent in profit. After the dot-com bubble burst, it lost more than 99% of its value, falling from a high of $990 in April 1999 to a low of $6.36 in December 2000. From that bottom, Priceline began a long, arduous climb to profitability that brought its stock price back to $358 a share last week.

Priceline closed the third quarter with a market cap just shy of $17 billion. That's more than double its nearest competitor -- Expedia (EXPE) -- and puts the company close to surpassing another Web giant of the late 1990s: Yahoo (YHOO), whose value has declined to $19 billion.

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In fact, at $17 billion, the stock market is valuing Priceline higher than it did back in June of 1999, when it was a poster child for dot-com excesses. The difference between Priceline's valuation today versus its valuation 11 years ago is this: Today, it's actually making a profit, and in fact, hasn't posted a net loss in three years. In the past four quarters, it has earned a net profit of $566 million.

This marks a quiet and slowly earned vindication for Priceline's business model. The company had a red-hot IPO because of its name-your-own-price method of selling airline tickets. Early on, it was hailed as a revolutionary way of doing business. It wasn't quite that, but eventually, it proved to be a pretty good idea.

Taking 'Name Your Own Price' to Europe Asia,

Priceline held to its name-your-own price model, but it was flexible enough to build a broader business around it. In fact, much of Priceline's current success goes back to a move that has little to do with its dot-com era origins: Five years ago, it bought a little-known Amsterdam startup called Bookings B.V. for $133 million.

Today, its Booking.com site comprises the bulk of Priceline's international business, which accounted for 61% of Priceline's gross bookings last year, as well as three-quarters of its operating income. Much of the rest comes from Agoda, a Singapore-based hotel reservation service that Priceline bought in 2007. Thanks to Booking.com and Agoda, Priceline's international revenue is growing 72% so far this year, nearly triple the growth rate in the U.S.

Priceline succeeded with Booking.com in Europe for a few reasons. Most importantly, it recognized that there was an untapped demand there for a service that displayed an Amazon-like obsession with low prices. No-frills airlines like Ryanair were pleased to discover the potential of partnering with a company that sold dirt-cheap travel on the Web. And Priceline found that not only were European travelers happy to book online, the market on the Continent wasn't as saturated as in the U.S. ThinkEquity estimates that 60% of U.S. travel arrangements are made through the Web, compared with 40% in Europe.

In addition, Priceline asked consumers to give up some of their flexibility to get a low price, such as the ability to cancel their flights for a refund or to reserve a flight at a particular time. Both of these concessions were aimed at courting airlines and hotels: They guaranteed bookings of flights and hotel rooms that might be less in demand. During the recession, the low-cost option appealed to travelers, while the guaranteed bookings won over hotels and airlines.

Is Priceline Overvalued?

Priceline's stock rally was temporarily derailed earlier this year when economic instability in Europe triggered concerns that travel would slow down. Priceline's stock fell from $273 in late April to $175 in early June. But in August, the company said growth in Europe remained strong. Following that bullish report, Priceline's stock rallied 51%, making it the S&P 500's best performing stock in the third quarter.

Partly because of that surge, concerns are growing again about the stock -- this time over its high valuation. But it's trading at 29.9 times its trailing 12-month earnings. And while that's certainly higher than the average P/E for the S&P 500 (which is 21), it's less than half of Amazon.com's P/E of 64.3. And much like Amazon, Priceline has a history of proving wrong those who predict its demise.