Online Travel Stocks Stranded

The skies have been anything but friendly lately for online travel stocks.

Not long ago, investors had high hopes for the likes of Expedia (EXPE Quote), Travelocity and Orbitz. These Internet upstarts were going to simplify the travel business by drawing traffic from travel agents and reservation phone lines. Profits were going to soar both for the sites and for their airline and hotel industry partners.

But it hasn't worked out that way. Increasing competition from players ranging from Google (GOOG Quote) to the big airlines themselves are slowing growth at outfits like the Travelocity unit of Sabre Holdings (TSG Quote) and Orbitz parent Cendant (CD Quote).

"People are overall fairly negative on the whole sector," says Aaron Kessler, an analyst with Piper Jaffray who rates Expedia market-perform and Priceline outperform. "They are most positive on the international side of the market. Domestic is going to remain a challenge."

Like other Web-based services, online travel is no longer a novelty. Competition is intensifying as airlines and hotels expand their efforts to get travelers to buy on their sites. Plus, there's the added problem of specialized search engines, including Kayak and Sidestep. These operations help people find the best deal by comparing prices over multiple sites.

These trends are tempering Wall Street's enthusiasm for online travel stocks. Expedia, which reported disappointing fourth-quarter earnings, is down 25% this year. Travelzoo (TZOO Quote), another online travel site, is down 20%.

Expedia, which last year was spun off from Barry Diller's IAC/InterActiveCorp (IACI Quote), is in the doghouse with Wall Street after giving lackluster guidance. Three analysts have downgraded the stock this year. None of the three analysts who follow Travelzoo recommends that investors buy the stock.

Shares of Sabre and Cendant have barely budged this year, even though both of their travel businesses are posting strong performances. Sabre expects Travelocity to triple operating income this year, while Cendant, which is spinning off its online travel business this year, is expected to realize an 18% to 22% gain in bookings in the first quarter.