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Online travel stocks have been flying high this February.
The action started when TripAdvisor (NASDAQ: TRIP) reported a better-than-expected quarter on Feb. 11. A modest revenue beat, and guidance for high-20% revenue growth in 2015, sent shares up in the double digits.
Follow-on gains now have shares of TripAdvisor up 25% since the beginning of the month. The company’s biggest obstacle at the moment appears to be a weak euro, which will take a bite out of profits for the foreseeable future.
But this challenge isn’t unique to TripAdvisor. And the stock has been aided in no small part by positive earnings results and news flow from competitors who face the same challenge.
Last Thursday, Priceline Group (NASDAQ: PCLN) beat fourth-quarter estimates and reported bookings growth of 17%, well above guidance of 8% to 15%. A large international business base meant bookings would have been 5% higher on a constant currency basis.
But clearly investors weren’t overly concerned – shares of Priceline are up 11% since the beginning of the month.
It’s not just earnings-related news that is driving investor interest as travel companies enter their busy time of the year. The entire industry tends to enjoy revenue growth in the first three quarters of the year, followed by a decline in the fourth quarter.
Over the last two years that seasonal trend has helped shares of online travel companies perform well in the first quarter.
But perhaps the biggest news came just a day after TripAdvisor reported. Expedia (Nasdaq: EXPE) announced its intention to buy competitor Orbitz Worldwide (NYSE: OWW) for $12 a share.
Expedia rallied 7% on the news, though Orbitz was the clear winner. Heavy trading volumes and investor demand have now pushed shares of Orbitz up 24% since the beginning of February.
All this positive news could not come at a better time for online travel stocks. Shares of Orbitz had been in a steady downtrend while shares of TripAdvisor had yet to recover from the plunge that followed its disappointing third-quarter earnings report. Shares of Priceline had been in a downtrend as well.
The question now is whether or not these stocks can continue their gains into the spring.
Priceline and TripAdvisor are likely to keep growing on a constant-currency basis. Given what we know now, I think it’s reasonable to expect around 8% revenue growth for Priceline and 25% for TripAdvisor in the coming year.
But while I want to believe that these stocks can maintain their current upward trend, I’m not convinced that they will.
Competition in the space is tough. And while revenue growth has been impressive the fact remains that a weak euro and increased investments will hurt earnings for both companies. That will in turn push up already high valuations. Using current year expected earnings, TripAdvisor now trades with a P/E of 40 while Priceline trades with a P/E of 22.
I think that after the current earnings and acquisition-driven euphoria has abated, the market will realize that near-term upside is limited. So while these stocks have been flying high so far this February, I’d advice reducing positions or staying on the sidelines at the moment. I expect we’ll see lower prices by spring, and that may be the time to get back onboard.
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