After Recent Declines, Should Investors Buy Into Expedia?

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Expedia (NASDAQ: EXPE) has been one of the worst performers of the whole market in the past week, with the stock falling nearly 30% in just two days.

What went wrong?

Expedia is a good example of a growth company that missed expectations. Before the declines, the company traded at a trailing 12-month P/E ratio of 65 compared to the sector average of around 23.

Expedia was expecting to achieve EPS of $2.19 this year, up from $0.99 in 2012, which would mean that the company would be trading at forward P/E ratio of 29, bringing the company's valuation into-line with that of its peers.

However, Expedia reported EPS of $0.51 excluding extraordinary items for the second quarter, which when coupled with its first-quarter loss of $0.77 per share indicated that unless the company achieves EPS of $1.10 during Q3 and Q4, it is not likely to meet its lofty growth expectations.

Indeed, analysts have recently revised EPS estimates for full-year 2013 down by 20% to $1.74 and estimates for 2014 EPS have been slashed by 15% from $3.30 per share to $2.80.

What now?

Expedia claims that it missed estimates due to increasing competition from rivals, which have been slashing costs in a brutal price war. It is unlikely that this pressure will abate any time soon and Expedia's stock still trades at a relatively high trailing 12-month P/E of 46, which indicates that the company's stock still has plenty of room to fall if earnings continue to disappoint.

On the other hand, peer TripAdvisor (NASDAQ: TRIP) reported higher profits for the same period. This is thanks in part to a shift away from displaying pop-up ads on its site, some of which directed customers to Expedia. 

TripAdvisor reported a 26% jump in quarterly profits as more traffic hit the company's website, driving up advertising revenue. Over 1 billion people visited TripAdvisor's site during the first half of the year, a painful back-hander for Expedia - TripAdvisor's parent.

TripAdvisor also stated that it intends to move into the print and TV advertising markets in a drive for more profits - an area where Expedia is typically dominant in the market.

TripAdvisor is in a better position

TripAdvisor is better placed to profit than Expedia, as the company does not rely on bookings to make a profit. Some 90% of TripAdvisor's revenue comes from advertising, which also give the company a platform to expand into the mobile market. The market loves this potential for growth, and if the company can keep up this momentum (7% EPS growth for the first half of the year), TripAdvisor is well placed to beat current full-year EPS estimates of $1.45 per share (versus EPS of $0.89 for the first half).

Still, these companies look expensive

The recent collapse in Expedia's stock price highlights what happens when stocks that are highly valued do not meet expectations. TripAdvisor is facing the same risk as Expedia, trading at a trailing-12 month P/E of 47.6, and if the company can't meet its lofty growth targets then investors will get hurt.

Travelzoo (NASDAQ: TZOO) could be a slightly cheaper play on the sector, trading at a trailing 12-month P/E of 24. The company is investing heavily to try and bring its offering inline with peers. In particular, it has been trying to simplify its online hotel-booking platform.

Unfortunately, this investing is cutting into earnings; the company's earnings fell 24% year-over-year in the second quarter due to higher costs. Revenue, on the other hand, a more telling indicator of sales growth, expanded 5% year-on-year.

Still, as the company is investing for the future and revenue is expanding, Travelzoo looks well placed for future growth.

Foolish summary

All in all, even after recent declines, Expedia still looks expensive on a valuation basis and growth is starting to slow. Additionally, the company's stock still has plenty of room to fall as the high valuation adds plenty of risk. On the other hand, TripAdvisor is still growing rapidly but the company's valuation looks a bit rich.

So overall, Travelzoo would appear to be investors' best bet as the valuation is low and the company is investing heavily for future growth.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends TripAdvisor. The Motley Fool owns shares of TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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