What went wrong?
Expedia Inc (NASDAQ:EXPE) is a good example of a growth company that missed expectations. Before the declines, the company traded at a trailing 12-month P/E ratio of 65 compared to the sector average of around 23.
Expedia was expecting to achieve EPS of $2.19 this year, up from $0.99 in 2012, which would mean that the company would be trading at forward P/E ratio of 29, bringing the company’s valuation into-line with that of its peers.
However, Expedia Inc (NASDAQ:EXPE) reported EPS of $0.51 excluding extraordinary items for the second quarter, which when coupled with its first-quarter loss of $0.77 per share indicated that unless the company achieves EPS of $1.10 during Q3 and Q4, it is not likely to meet its lofty growth expectations.
Indeed, analysts have recently revised EPS estimates for full-year 2013 down by 20% to $1.74 and estimates for 2014 EPS have been slashed by 15% from $3.30 per share to $2.80.
What now?
Expedia Inc (NASDAQ:EXPE) claims that it missed estimates due to increasing competition from rivals, which have been slashing costs in a brutal price war. It is unlikely that this pressure will abate any time soon and Expedia’s stock still trades at a relatively high trailing 12-month P/E of 46, which indicates that the company’s stock still has plenty of room to fall if earnings continue to disappoint.
On the other hand, peer Tripadvisor Inc (NASDAQ:TRIP) reported higher profits for the same period. This is thanks in part to a shift away from displaying pop-up ads on its site, some of which directed customers to Expedia Inc (NASDAQ:EXPE).
Tripadvisor Inc (NASDAQ:TRIP) reported a 26% jump in quarterly profits as more traffic hit the company’s website, driving up advertising revenue. Over 1 billion people visited TripAdvisor’s site during the first half of the year, a painful back-hander for Expedia – TripAdvisor’s parent.
Tripadvisor Inc (NASDAQ:TRIP) also stated that it intends to move into the print and TV advertising markets in a drive for more profits – an area where Expedia is typically dominant in the market.
TripAdvisor is in a better position
TripAdvisor is better placed to profit than Expedia Inc (NASDAQ:EXPE), as the company does not rely on bookings to make a profit. Some 90% of TripAdvisor’s revenue comes from advertising, which also give the company a platform to expand into the mobile market. The market loves this potential for growth, and if the company can keep up this momentum (7% EPS growth for the first half of the year), TripAdvisor is well placed to beat current full-year EPS estimates of $1.45 per share (versus EPS of $0.89 for the first half).
