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The Market Has Taken Expedia to the Woodshed

Expedia (NASDAQ:EXPE) recently reported its third-quarter earnings. At a time when stock market indices have hit their all time highs, the Bellevue Washington-based online travel company suffered its worst stock price drop in history as it failed to meet earnings expectations.

As a result of increased competition from the world's largest search engine, Alphabet's Google (NASDAQ:GOOGL), other similarly established online travel peers did not escape the market's dissent as share prices of Booking (NASDAQ:BKNG) and Trip Advisors (NASDAQ:TRIP) also fell. Expedia identifies the need for higher costs in the short-term but still expects itself to return to healthy growth and attractive returns in the long-term.

Having failed to meet Wall Street earnings expectations for its recent quarter and announcing that it will have to increase expenses in order to cope with increasing competition, Expedia's stock price dropped 27.4% in just one day. The online travel company reported $3.38 earnings per share compared to the predicted $3.81 per share share on revenue that has grown 9% year over year to $3.4 billion.

The loss of about $6 billion in value in a day could be due to more than just being 13% off of earnings expectations.

On its earnings call, Expedia highlighted that it has encountered higher costs because of Google search dynamic changes. The company noted that it saw "incremental weakness" in its search engine optimization (SEO) volumes, therefore making Expedia spend more on marketing to attract more customers.

As a result, Expedia's total selling and marketing expenses rose 11% or $159 million this quarter compared to just 3% or $40 million a year ago.

"It's principally Google pushing SEO down the page, and there's just a natural outcome of that. Obviously, the team is very dynamic and is constantly looking at opportunities and trying to do a good job of balancing room night growth with our overall profitability." -Chief Financial Officer Alan Pickerill

Also, Expedia's adjusted Ebitda (earnings) for all of Expedia's business segments (Expedia, Travelocity and CarRentals) fell flat or experienced no growth at all this quarter, a marked slowdown from the 23% growth the company recorded a year ago.

The company also lowered its full-year 2019 guidance for its adjusted Ebitda growth to 5% to 8%, a decline from 15% last year.

Despite the added cost that led to lower profits and has pulled Expedia's stock down to the floor, the company remains positive and considers the increasing competition from the world's largest search engine to be addressable by its spending increase and its rewards program.

Several analysts have lowered their recommendations on Expedia's stock post-earnings announcement. Piper Jaffray, for example, lowered its ratings to neutral from overweight and cut its target price from $160 to $124 a share.

Now trading at 14 times forward earnings, Expedia could still provide some healthy gains of about 18% to reach its historical multiple average of 20 or $117 a share from yesterday's market closing price of $99 a share.

Disclosure: Long Alphabet.

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This article first appeared on GuruFocus.