Yahoo! and the Future of Online Travel

Updated from Sept. 8

A big problem with an overvalued stock like TravelzooTZOO is the threat that someone will come along and build a better mousetrap.

Not that business fundamentals have mattered much in the Travelzoo story, but online giant Yahoo!YHOO is beginning to test-market a search service that could pose a challenge to the online travel space. Yahoo! introduced its FareChase search engine Tuesday evening, although the system is still a work in progress.

Yahoo's Farechase allows a person to simultaneously search 150 travel Web sites for the best airfares, hotel rates, and car rental rates. Youssef H. Squali, a Jefferies & Co. analyst, in a research note, calls the new Yahoo service a "direct assault on pure-play travel sites."

Travelzoo, meanwhile, lists sales and specials from more than 300 travel-related companies on its site. Companies pay to advertise with Travelzoo. The company also boasts a search engine to permit travelers to comparison-shop and it publishes an email newsletter that lists 20 of the week's best travel deals.

Yahoo!, of course, has the resources to blow Travelzoo out of the water when it comes to marketing its service. With $5.2 million in cash and $13.6 million in revenue during the first six months of the year, Travelzoo is in no position to get into an advertising spending war with Yahoo!, which had revenue of $1.6 billion last year.

Sure, the Yahoo! service also poses a threat to online travel sites such as OrbitzORBZ, priceline.comPCLN and InterActive'sIACI Expedia. But none of those stocks trade anywhere near the inflated valuation of Travelzoo's shares.

"This is was we've been talking about: what Travelzoo has is not that difficult to replicate," says George Mihalos, a Brean Murray analyst, who has had a sell recommendation on Travelzoo's shares since he began covering the New York company in July.