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Travelzoo's stock price was sliced by 25% yesterday after the company reported in-line results and news of an SEC probe into the trading in the stock in 2004. Here's how American Technology Research analyst Mark Mahaney explains the stock's collapse:

"We view this as One Big Valuation Reality Check. The shares were up 29% intra-quarter. These shares were also up 997% in 2004. And the shares were trading at 103X 2005 Street EPS. We initiated with a Sell rating on October 18th at $62 in part because of what we viewed as an unjustifiable valuation. We believe the In-Line results have caused the market (the very small 2MM share float that is the TZOO market) to focus on the very high valuation. We also have had other concerns, including: 1) customer concentration -- and we believe this risk increased with the December results; 2) little sustainable competitive advantage; and 3) specific competition from Yahoo! and others -- and we believe Yahoo! will be formally launching its FareChase search engine shortly. So we'll reiterate our Sell rating."

TZOO chart below.
Big

Source: TZOO collapse a sympton of extreme valuation?