Expedia Incorporated (EXPE) owns and operates dozens of websites worldwide that offer extensive services related to travel. The company is a clear "second-best-in-class" behind Priceline (PCLN) in the online travel agency market, which has all but eliminated brick and mortar counterparts. From flagship North American site Expedia.com to majority owned Chinese subsidiary eLong (LONG), Expedia is integrated globally as an established player in hotel, airline, car rental, excursion and other bookings.
Over the last two decades consumer habits have progressively shifted to web-based storefronts based on price and convenience. Twenty and thirty-somethings hardly remember the good ol' days and younger generations have grown up with the internet in their pockets. Even most 60 and 70 year olds who failed to embrace this paradigm shift at first now embrace it fully.
Bankrupt Blockbuster has left the movie rental equation, now comprised solely of web-based players Netflix, Hulu and others. While cloud storage companies and other technology innovators may be justifiably priced for rapid growth in coming years, internet storefronts are not.
Like many other consumer companies Expedia recovered from the abyss thanks to actual monetary stimulus (unlike QE3) in FY2009 and managed to grow top and bottom lines substantially in FY2010. Still, net income in 2009 barely equaled that of 2007 and growth was minimal in FY2011. With a paltry sub-1% dividend yield, Expedia's P/E ratio in excess of 23 is exorbitant at almost twice that of the S&P 500.
Another major headwind for Expedia is Priceline's recent purchase of Kayak, a price comparison platform on which Expedia is the leading advertiser. Furthermore, online travel agents such as Expedia and Priceline face continually amplifying online competition from originators of the services they resell. Airlines and hotel chains offer the same prices through their own websites and offer loyalty rewards programs.
Much like Netflix, currently trading near $80/share, which rallied from $3 in 2003 to $300 in 2011, Expedia's days of rapid growth have come and gone. The stock currently sits just above $60/share, a level that has proven to be a major ceiling first in 2007, then again each of the last three years. The stock underperformed significantly, as did PCLN, over the markets Thanksgiving week surge.
Selling EXPE short is an appealing play with potential upside in excess of 60% in a likely economic downturn. Given the competitive landscape, technical resistance, uncertainty throughout developed economies and tightening consumer wallets, shares have limited room to run. Long dated put options on the stock are expensive, however January 2013 $55 and $65 puts offer an attractive risk/reward ratio at the current price of $1 and $5.40, respectively.