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Spokane, Washington  Est. May 19, 1883

Despite recent drop, Priceline’s worth a look

Priceline continues to post profit margins well in the double digits. (Associated Press)
Universal Uclick

Shares of online travel giant Priceline (Nasdaq: PCLN) dropped recently, as investors reacted negatively to its latest earnings report. Foreign currency fluctuations are hurting the company, but from a long-term point of view, Priceline looks remarkably solid.

Gross travel bookings, the total dollar value of travel services purchased by customers, rose 12 percent over the year-ago quarter, totaling $13.8 billion. The company produced most of its gross bookings in international markets, and removing the effect of the strong U.S. dollar, gross bookings grew by 26 percent. Growth in the U.S. is disappointing, though, with U.S. bookings rising only 2.1 percent.

Priceline is aggressively investing in marketing and advertising, and this is taking its toll on profitability. Total operating expenses grew 28 percent year over year, increasing at a faster rate than revenue and eroding its profit margin. These investments can drive revenue growth for years into the future – and can help it battle competitors. (Amazon.com is entering the arena, for example.)

Overall, Priceline is still growing at a vigorous speed, and it remains a remarkably profitable business, with profit margins well in the double digits. Its brands include Booking.com, priceline.com, agoda.com, KAYAK, rentalcars.com and OpenTable. Its recent share price near $1,200 looks like a buying opportunity for investors with a long-term horizon. (The Motley Fool recommends Amazon.com and Priceline and owns both.)

Ask the Fool

Q: What are buy-side and sell-side analysts? – L.O., Carmichael, California

A: They’re different kinds of stock analysts. Buy-side analysts work in-house for institutions such as mutual funds and pension funds, studying possible investments and recommending purchases or sales of various securities. Sell-side analysts are often employed by brokerages and offer their broad analysis and recommendations to the brokerages’ customers. (Getting customers to trade generates commission fees for the brokerage.)

You may be able to access a wide range of sell-side analysts’ research reports through your brokerage. Learn more at broker.fool.com.

Q: What does “liquidity” mean, financially speaking? – C.C., Butler Beach, Florida

A: It sometimes refers to a company’s cash as well as assets that can be quickly converted into cash (such as money market funds and stock and bond investments), minus its short-term debt. Companies with high liquidity can be less risky, but they might also grow more slowly, with assets that could be used to grow the business instead kept readily accessible.

It also refers to a stock’s ability to handle a large volume of trading with minimal volatility. If major investors such as mutual fund managers want to buy a million shares of something, they don’t want their purchases to start driving up the stock price before they finish buying.

Imagine the Velvet Elvis Art Factory Inc. (ticker: KINGG). If it has 10 million shares outstanding at $8 per share, there’s only $80 million worth that the market can buy or sell. If some or much of that is owned by company insiders, then even fewer shares are available. Compared to many large companies that trade more than $500 million or $1 billion worth of shares per day, it’s tiny, illiquid and probably volatile.

My dumbest investment

I started my first job in 1980 and had a great friend with a mutual interest in stocks. He came up with the “buy of the century,” a company researching computer fans made of tiny wings that flapped on the piezoelectric principle. We still laugh about that one 35 years later, so we have been compensated with entertainment value.

Later, in the 1990s, I found Imatron, a revolutionary medical imaging company. I bought shares at $1, more at $3, watched it go to $8, back to $1, back to between $5 and $7, and then sold it when it went back to $1. It was hard to lose money on that one, but somehow I managed to do it!

The stories can go on forever, but the good, the bad and the stupid have enriched my life beyond the money. If I’d been more patient, I’d be richer today. The mistake I did not make is to have put money ahead of my life, my family or my job. – W.H., Point Clear, Alabama

The Fool responds: Those are great lessons. Remember that a compelling product (or idea for a product) isn’t enough. Ideally, you also want to see growing sales and profits, low debt and a strong competitive position. Imatron ended up attractive enough to be bought by General Electric in 2001. Had you held on, you might have made a few dollars.