Funny how the markets work, isn’t it? If you have been following this blog for a long time, you will know that i did this exact trade on December 17th, based mostly on valuation reasons as I thought the economic context did not validate BlueNile having a higher P/E ratio than Priceline. Of course, that trade worked out perfectly and was closed with a profit of 30%. Then, last week, I wrote a small note about how Priceline got destroyed because of an announcement by competitor Expedia(EXPE). Expedia basically announced a full range of specials ranging from specials on multi-day hotel room reservations and the fact that for some purchases they would not charge their standard 5$ fee.
Will these measures hurt Priceline in the short term? Absolutely. But I do not believe that such measures will have a medium to long term effect. Priceline is profitable and battling it out against 2 companies in Orbitz and Expedia that are increwasingly desperate to regain market share. Look at the below graph from Compete.com. Expedia still has the overall lead in visitors but look at the changes Year over Year.
Still wondering why the competition is getting desperate? More traffic means more revenues and more profits. I don’t think Expedia will be able or desire to keep these promotions going for too long. They are simply trying to hurt Priceline in the short term and regain market share. So overall I’m not worried at all about Priceline’s future. Their margins in the next quarter or two might be hurt a little but they are still the leader to be in the sector and will be growing.
That brings me back to the comparison with Blue Nile(NILE). It is not clear to me how Blue Nile can still command such a high P/E ratio. I think the company is promised to great things in the future, is the leader and will be destined to greatness. But trading at a P/E of 40 when it is in the business of luxury in an economy where consumers are cutting back on all big expenses makes no sense to me. Blue Nile had impressive growth in the Q4 which was to be expected with Christmas being a big time for their sales. But it was still lower than the 2007 Q4 and I would not expect things to turn around quickly.
No doubt that the main risk in this trade is seeing Expedia go for broke with agressive advertisement campaigns that could result in a worse than expected performance by Priceline but I still believe that overall the Expedia business model is stronger and it will come out on top in the mdeium term.