Travelzoo Loses Altitude

Updated from 7:55 a.m. EDT

The party in online travel service Travelzoo(TZOO Quote - Cramer on TZOO - Stock Picks) took an uncharacteristic break Friday, with the stock tumbling 10% after a run-up that brought its forward price-to-earnings multiple into the triple digits.

The stock closed down $4.69 to $41.10 on well over twice the average daily volume.

Coming into Friday, Travelzoo was up 429% since the start of the year. Daily volume, which had averaged fewer than 10,000 shares back in January, now regularly tops 1 million. Before Friday, the stock had risen 15% this week alone.

The feeding frenzy in Travelzoo began in late April, right around the time the six-year-old vacation dealmaker reported first-quarter earnings. News that the company's revenue surged 70% to $6.4 million and earnings rose 160% to $1 million got the stock going, and it has been surging ever since.

Has a normal reaction to positive earnings news gotten out of hand? The run-up in Travelzoo's stock has given it an eye-popping valuation of 118, evoking memories of the bubble. This for a company that is almost totally dependent on Internet advertising, a notoriously fickle master.

To put Travelzoo's valuation into perspective, consider that Internet behemoth Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) trades at a forward P/E of 62, while shares of market newcomer Google(GOOG Quote - Cramer on GOOG - Stock Picks) change hands at 47 times expected future earnings.

The spike in Travelzoo's stock has boosted the company's market capitalization by more than $570 million. Travelzoo has gotten so big so fast that it has moved from a listing on the OTC Bulletin Board to the Nasdaq Smallcap Market to the Nasdaq National Market, all within the span of eight months.

No one is rejoicing more than Ralph Bartel, the company's 38-year-old founder, chairman, president and chief executive. Bartel, who owns 87% of the company's 15 million shares, is worth $600 million on paper, enough money to make a Google insider blush. This year he already has sold $2.5 million in stock, although none since May, when shares were selling around $20.