Priceline.com… The Harder They Fall

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Priceline.com Incorporated (NASDAQ: PCLN) is finding out the lessons of life today… The more they rise the more they fall. Today’s drop is being tied to an analyst downgrade to Hold from Buy out of Deutsche Bank. The analyst also lowered the price target objective from a very bullish $800 down to $710.

Is it good news that the revised lower price target still has an implied upside of 13% or so? Not really. The consensus price target is now back under $760 and is likely heading lower.

One of the assumptions behind today’s downgrade from Deutsche Bank is that the firm believes a cold war pricing strategy is starting to take hold among the online travel sites. This puts pressure on Expedia Inc. (NASDAQ: EXPE) as well. What is so odd is that TripAdvisor Inc. (NASDAQ: TRIP) is down almost 1% today even though Deutsche Bank upgraded this stock today to Buy from Hold with a $50 target. If Deutsche Bank turns out to be right, then that is more than 25% upside in TripAdvisor shares.

If you go back to Priceline.com, the gains that this stock have seen were monumental. The aggregating price auction site is still worth a whopping $31 billion even after today’s 5% drop to $626.35. That might not sound like much until you start considering the value of the great hotel chains and airlines that it sells for.

Perhaps this is just the market catching up to Priceline.com. Shares were valued at more than 21-times this year’s expected earnings and valued at 17.6-times expected 2013 earnings. For about 20% average revenue growth that is not ridiculous when you consider over 30% earnings growth this year and 20% earnings growth expected in 2013. The question is whether or not this can be sustained.

Priceline.com shares are up 33% so far in 2012 and that even includes Monday’s drop. If they are going to crush Apple without care or prejudice, what will they say about a travel booking site making far higher profits than the airlines and the hotels that actually perform the services used by travelers?

JON C. OGG

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