I once attended a live performance of Long Day’s Journey Into Night. It was a marvelous show. But some audience members, conditioned by years of TV sitcoms, felt compelled to laugh at particularly well-acted bits of despair, assuming that finally, finally, the playwright had broken the interminably building tension. No such luck.
The current state of the stock markets might be compared with these misplaced guffaws. Helped along by interest rate cuts, some of the biggest goats of the dot com meltdown period seem to be finding favor with investors even though they’re far from out of the woods. I was actually under the impression that Priceline.com was now just an occasional skit on SNL, but no, if you look it up on Yahoo, you’ll see that the company that once paid William Shatner to make fun of himself is still alive and clinging to an optimistic market capitalization of about $1.5 billion. This is post-meltdown, folks, when wave after wave of recriminations and shareholder lawsuits have supposedly dragged all the “dot bombs” down. So what gives?
Now that they’re all in the doghouse, the only way that dot com companies and their associated analysts can get anyone to pay these kinds of prices for their stock is to invent some kind of story about imminent profitability, with a dash of European and Asian expansion thrown in for added chutzpah. While behemoths like Nortel downgrade and lay off thousands, and refuse to speculate on when they might once again become profitable (citing the “lack of visibility” as we head into the teeth of a recession), some dot com hopefuls are talking about becoming profitable in “Q4” or even sooner.
Failure to meet such targets will be the kiss of death for many of these companies: you can only cry wolf so many times. It seems, though, that more time can be bought when another layer of madness is added: creative financial reporting. The kind where every loss is a profit, if only you measure it right. With judicious use of terms like “pro forma break even” and “cash flow positive,” you can string things along for an amazingly long time.
The accounting tricks played on Wall Street to make results look better are an old story. Earnings, revenues, assets, cash… all can be, and are quite often, faked. Faked with the blessing of – or at least under the noses of – auditors and analysts whom many investors assume are attuned to the inner workings of the companies they follow.
Value investing guru Benjamin Graham, in later editions of his classic text on value investing, The Intelligent Investor, made a case for more standardized Wall Street accounting practices. In the late 1960’s, it became increasingly common practice for companies to cram all the bad news into one horrendous year, reporting “one time” charges that would not need to be reported in future years.This trick allows companies to show quarter after quarter of steadily increasing profits, as long as one is prepared to mentally blot out that big “oops” year. Another company Graham followed went beyond this; for eleven consecutive years, it reported that it had paid no income tax, which led Graham to wonder about the reliability of the stated results.
Stage-managed fiscal reporting is unethical, because it gives investors little warning of operating slowdowns or problems facing businesses. GE is one company that has taken earnings management to extremes, reporting 100 consecutive quarters of increasing earnings. For the weaker companies, there is much less leeway to play games: they might get away with couple of quarters of too-early revenue recognition (“stuffed channels”), but eventually the jig is up. It’s safe to say that most negative earnings surprises are not surprises at all to those in top management.
Graham, in the Intelligent Investor, identified a particular sector that was the worst offender in this area. This same sector, he charged, also took advantage of bull markets to foist public share offerings for unproven companies with few revenues and weak business prospects on an unsuspecting public. What sector was Graham so critical of? Computer technology companies.
The pattern with struggling and perpetually-break-even tech companies is almost nauseatingly familiar. Through various contortions (making unfavorable deals with partners, for example, essentially borrowing from the future profitability of the company) one can show a steadily decreasing quarterly loss for several quarters in a row, culminating in a break-even quarter that is touted as “pro forma profitable”, “cash flow positive”, or some such nuance implying profit. What happens next? The next quarter “surprisingly” misses projections by a mile, the stock plummets, and shareholder lawsuits ensue. (Of course that doesn’t happen to every startup company. Some really do turn profitable.)
Which brings us back to Priceline. How can an unprofitable company, written off for dead by the financial press, in a stock market sector which has seen every trick in the book and heard every cry of “wolf,” be valued at a billion-and-a-half dollars? Much of their revenue seems to be coming from the travel business. Just imagine what this thing could be worth if you threw space travel or time travel into the mix.
The clever headline writers were always playing with Priceline’s slogan, Name Your Own Price. They wrote that Priceline “named its own IPO price”, and when things went sour, of course, they sneered that Priceline “named its own loss”. So why the market amnesia today? Evidently, the remaining stock market players actually enjoy the arbitrariness of stock prices. It’s more fun than bungie jumping, less toxic to the system than hanging around in smoky pool halls. Jay Walker, the founder of Priceline, recently dumped a large percentage of his stake, finding a willing buyer in the person of a wealthy Hong Kong investor. (Actually, a quick look at SEC filings shows that the Walker’s holding company was selling relentlessly when the stock was near its sub-$2 low… one must marvel at his ability to sell a much larger chunk at over $7.)
To be sure, the online travel business – which is what Priceline is more or less now in (it’s either disintermediating or reintermediating the travel business, to use the gung-ho jargon of 1998) – is big business. To be fair, there is certainly something to be said for a system for finding vacant three-star hotel rooms for the best possible price. But is this an earth-shattering advance on the concept of shopping for discounted accommodations using a human agent for support? And for most consumers, isn’t the idea of promising to pay a certain price, and then waiting to see if you actually got it, actually more cumbersome (and risky) than the conventional method of comparison shopping? Priceline competitor Hotwire, backed by a consortium of six major airlines, boasts that its discount online travel service is not a reverse auction, and consumers can actually see the price before they commit. Hotwire has its drawbacks, too – users can’t nail down the exact departure and arrival times until after they’ve paid. It’s not clear just how much control consumers are willing to give up to chase a travel bargain.
You can buy a car on Priceline, too. Just dial up the make and model, “name your own price,” and boom, if your price suits them, a local dealer with sell it to you. Don’t worry… it probably isn’t a conspiracy and the auto dealership who sells to you through Priceline probably won’t stick you with a lemon for having the audacity to try to circumvent your local dealership.
One investor seems eager to trade shares in this travel business for some cold hard cash. Just over a month ago, Delta Airlines owned 16% of Priceline.com. Clearly believing the shares to be overvalued, Delta sold 5 million of them on the open market, reducing its stake in Priceline to 11.9%.
In the heady early days, Priceline wasn’t supposed to be in the travel business per se. It had invented a new way of pricing goods and services! It was going to license this “technology” and spread it like the gospel to help consumers find deals on things like groceries and gasoline. Consumers would be “naming their own price,” and excess inventory was going to be sold off by the travel industry (and others). The scheme was win-win. It was brilliant. It was convoluted. It was the sort of thing you needed a diagram to follow. New-economy business mags obliged, with flowcharts and computer-generated stick men who were busily reintermediating some industry or another. Priceline was practically going to reinvent capitalism. To cover their asses, as journalists are so adept at doing, even the most breathless reports contained the usual “it remains to be seen if” disclaimers, and the requisite suspicion of the “high flying” founders and their IPO wealth.
Before long, it became obvious that this reintermediation-thingy wasn’t in itself a business; certainly not a business you could start up from scratch with some computers and investors’ dollars. It might be an important idea, or a trend – the economy surely benefits from an increased use of online information gathering to increase the efficiency of transactions – but this is hardly a trend or an idea that can be monopolized or patented by one startup company.
As the premise of Priceline-as-new-paradigm proved fictional, the diagrams of precedent-shattering pricing models we squinted our eyes to follow turned out to be little more than hallucinations. If Priceline is to survive – and today’s relatively rampant enthusiasm for its stock suggests that it will – it will survive as a company that focuses on the ins and outs of a particular industry, the travel industry. It will be buying wholesale, and selling retail – and telling you, the consumer, that you’re getting wholesale prices. That’s going to be a tough game to play, because it caters to unusually price-conscious consumers. Sure, we all like a bargain, and many of us are prepared to go online to search for it. It’s enticing to cut out the middleman. To disintermediate, or reintermediate. But discounts and excess inventory weren’t invented by Priceline. As some of us have discovered, it is possible to get hands-on service from a live travel agent who may find you almost as good a discount as the online services while providing you with reassurance, advice, and followup. Many people believe that to get a “last minute” type discount, you need to use a special “last minute” travel service. Not so. If you use a non-upscale travel agent, just give ’em a call at the last minute. They’ll find you that “selloff” in one of the three acceptable-to-you resorts on that Caribbean island you’re looking for, or the best available price on that flight to Chicago. What’s more, they might warn you of that impending volcano, volatile political situation, or confusing navigation to the Alamo car rental desk. Middlemen may grate on us sometimes, but in a lot of cases, they earn their keep.
Sure, there’s always that segment who will go the extra mile for a very deep discount. But they’re a fickle bunch. Why wouldn’t discount travel consumers opt for a different discounting gimmick in the long run? And there are plenty to go around. For sheer novelty, some may like Orbitz, a travel portal which has just launched with the bright idea of attracting customers with giveaways. Microsoft Expedia’s superior usability would make it my personal choice – I’m actually able to find the bargains as opposed to playing tag with the search engine all day. For non-U.S. users, too, a more mature company like Microsoft will be easier to deal with. Playing around on Hotwire or Priceline, you can be out of luck if you don’t enter a ZIP Code.
So Priceline’s fate seems rather mundane in the end: to duke it out with competitors by doing a high volume of business in an industry with thin margins. Sounds like Business 101, not 2.0.
Given the arbitrarily high valuation being placed on this unprofitable travel reseller (and others like it) in the light of everything that ought to have been learned over the past four years, it seems fitting that the NASDAQ stock exchange plans to go public itself this year. Perhaps the whole stock market thing can be billed as an interactive gaming web site. Traders can don virtual reality headgear and Name Their Own Reality. Quarterly losses can be dismissed as “magical force fields.” When predictions of profitability don’t pan out, lifelike gremlins will swoop into your field of vision, stick out their tongues, and squeal “fooled you sucka!!” If the stock exchange is closed for a day due to a computer malfunction, an exec with longish hair and avant-garde-looking eyeglasses can casually remark, “hey, we’re a media company now.” When a company is finally delisted from the exchange, its directors may tell you that it was taken to a distant Pink Planet, in a parallel universe not at all like our own. They’ll refer you to a web site displaying bid and ask prices in an alien currency (Flooz or Beenz perhaps). Sounds like a company Joe Firmage could run in his sleep.