Matthew Goldstein

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Yahoo! and the Future of Online Travel

Matthew Goldstein

A big problem with an overvalued stock like Travelzoo(TZOO) 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 Orbitz(ORBZ), priceline.com(PCLN) and InterActive's(IACI) 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.

A Travelzoo spokesman did not return a call for comment.

Travelzoo's ascent has impoverished enough bears to make clear that absolutely nothing should be relied upon to damage its shares seriously. The stock lost $3.26 to $51.14 Wednesday, one day after rising 28% on no news whatsoever.

It's been that way with Travelzoo since the spring. The stock is on a tear, up 530%, as the once little-known company is fast becoming the new favorite stock for fast-fingered momentum investors and day traders.

As was reported here before, the stock owes its fantastic run to a combination of hype surrounding Google's(GOOG) initial public offering, an industrywide revival in Internet advertising, and a scarcity of shares.

Ralph Bartel, the company's 38-year-old founder, chairman, president and chief executive, owns 87% of the company's 15 million shares.

So, with only 2 million shares available for regular trading, Travelzoo's low float makes it difficult for would-be short-sellers to find a broker willing to lend them shares. Those that have managed to short the stock are often forced to cover their positions when Travelzoo goes up.

Trading in Travelzoo has recently been so heavy that it now is regularly trading more shares a day than its float. On Tuesday, 4.6 million shares changed hands.

The surge in Travelzoo's stock has left it with an outsized valuation for a company with $2.3 million in net earnings during the first half of the year. The stock trades at a price that's 300 times trailing earnings.

Mihalos says fundamentals mean nothing to the traders who keep bidding up Travelzoo. But he says a bad ending is inevitable for investors who get lured into buying shares at ever higher prices.

"I think you have a bunch of traders who are playing games with this stock," says Mihalos. "It's sort of like a cat playing with a ball of yarn. But it's inevitable that this will end badly."