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Travelocity stock slide puzzles analysts

The past week's 40 percent plunge leaves analysts baffled: The travel site doesn't seem to be straying from its path to profitability.

Travelocity.com shares plunged nearly 40 percent in the past five days as the online travel site encountered mysterious turbulence among investors.

The stock, which closed at $28 last Friday, ended the regular session on the Nasdaq at $18.44 a week later--a drop far greater than the 9 percent decline in the tech-heavy Nasdaq.

The steep sell-off has left analysts baffled, given that the company is still on track to reach profitability in the June quarter and has not released any news to the contrary.

"A lot of travel sites were down 3 percent to 5 percent Tuesday, after Merrill Lynch came out with a report that passenger demand was expected to decline," said Thomas Underwood, a Legg Mason analyst. "But it's difficult to attribute Travelocity's continued sell-off to that report."

Merrill Lynch analyst Michael Linenberg wrote in his airline industry report that demand for air travel is expected to decline this year because of deteriorating consumer confidence, increased layoffs and flat corporate profits.

Although competitors Expedia and Priceline.com were initially affected by the Merrill Lynch report, they have not fallen as sharply as Travelocity. Expedia is down 13 percent since last Friday and Priceline is virtually flat.

"Travelocity had tremendous volume on Tuesday, and I believe there may have been a large shareholder who was trying to exit their position expeditiously," Underwood said.

Underwood, as well as other analysts, said investors should consider snapping up Travelocity shares at these discounted prices.

"Given our belief that the company is solidly positioned to achieve both near-term and long-term expectations despite concerns of a slowing economy and a difficult advertising market, we recommend investors take advantage of recent share weakness to build positions in this attractive Internet survivor," Robertson Stephens analyst Lauren Cooks Levitan said in a report.

Research outfit IDC is also bullish on the sector. It released an e-commerce travel industry report Friday noting that online travel is one of the strongest e-commerce sectors. The report also pointed to the airline industry as representing the largest share of e-commerce travel.

"IDC estimates U.S. online airline ticket sales alone soared past $7 billion last year and will climb much higher altitudes in the next few years," the IDC report stated. However, the report did not mention the economy's macro effect on airline ticket sales.

In sizing up Travelocity's business, Underwood said the financial outlook remains strong and he does not believe the sell-off was sparked by any weakness in revenue or profits for the current quarter.

"Their business is going well and I can't find anything business-wise that would spark a sell-off," he said.