Internet stocks play (Blue Nile vs Priceline)

By: ispeculatornew
Date posted: 12.17.2008 (4:00 am) | Write a Comment  (7 Comments)

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In the current environment, even a tech stock can be very different from one to another. An interesting way to look at things is through Priceline.com(PCLN) and Blue Nile.com (NILE). You might have heard of both but in case I will give you a brief description.

Priceline.com is a travel comparison website that offers the possibility of getting very cheap deals on a variety of travel needs, mainly hotels and plane tickets but even cars, cruises, vacations. Their main objective, above anything else is to beat prices by any competitor. They do have some competition by search engines such as Kayak.com but have generally been able to live up to their promise of providing the cheapest holiday.

Blue Nile is a company that has perhaps had even more of an impact in its industry. It is a rather high end jeweler that is completely online. Its impact has been even more dramatic than for example the impact of Dell on the pc industry. That is because gross margins in the industry are very important to cover for all the costs of stores, employees, etc, etc. Blue Nile has thus been able to get higher margins than competitors while giving their customers much better pricing.

The contrast is very interesting of course in that Priceline is perfectly suited for visitors that are looking to save on their vacations while Blue Nile is targeting those who are looking at making an expensive gift or perhaps even securing the woman of their dreams by buying an engagement ring. And while a diamond is forever and love for life does not have a price, the diamond you buy does have one.

And in this environment of uncertainty and tough economic conditions, you would think that there might be a lot more of growth in the company that is helping its clients save money. It is not a random fact that Walmart (WMT) has been one of the best performing companies in this tough environement and you would think that Priceline could profit as well. Sure, not as many people are going on vacations, but I still think that over the short to medium term, Priceline will have a much better growth story than Blue Nile.

So it was a big surprise for me to see that Blue Nile is actually trading at a higher P/E ratio (27) than Priceline (17). In the past year, the story has been a complete opposite as Blue Nile has seen both its sales and profit fall by close to 50% while Priceline has enjoyed a 50% increase in revenues and almost 100% in Gross profits.

I would thus argue that I would go long Priceline(PCLN) vs short Blue Nile(NILE) but only for a few months until the valuations make more sense or until their P/E ratios move closer to each other.

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7 Comments

  1. Comment by Zachary Scheidt — December 19, 2008 @ 6:43 am

    I agree with you and in fact, I recently wrote an article on Blue Nile where I recommended shorting the stock based on valuation and deteriorating economic trends.

    Many believe Blue Nile will hold up because the ultra-wealthy will still buy jewelry. However, the majority NILE’s business actually comes from the average joe buying an engagement ring. The company is seeing those purchases downgraded to smaller diamonds and less expensive mountings. It doesn’t look good.

    Enjoyed your post,
    Zach
    http://zachstocks.com

  2. […] a quick note to let you know that I now take back half of the trade I had suggested December 17th (see here). In that trade, I had suggested going long Priceline (PCLN) vs short Blue Nile (NILE). I had done […]

  3. […] note to let you know that I would now close out my recommendation from December 17th on going long Priceline (PCLN) vs short Blue Nile (NILE). It was intended to be a longer term play […]

  4. Comment by admin — January 11, 2009 @ 3:41 pm

    Ok…so as I just wrote, getting out of this trade for now with a 30% return…

  5. Comment by Jerica Arbour — February 22, 2009 @ 10:47 am

    I can’t see some of your images 🙁

  6. Comment by IS — February 23, 2009 @ 12:46 pm

    Where exactly?

  7. […] 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 […]

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