In an increasingly do-it-yourself world, more of us are becoming DIY
travel agents. Online-travel revenues hit $54 billion last year—a
quarter of all industry bookings—with $24 billion of that going through
Internet agencies as opposed to airline and hotel websites. What's more,
online-agent revenues are expected to grow another 50% by 2009.

That trajectory has launched two moguls—Barry Diller of
IAC/InterActiveCorp and Henry Silverman of Cendant—into extreme-moguling
mode: Their mini-conglomerates own several online agencies and are now
shuffling assets to create stand-alone, publicly traded travel
companies. That suggests Diller and Silverman see the chance for higher
stock market valuations. IAC's travel operations, including Expedia,
"will be best served unleashed and empowered as a stand-alone entity,"
Diller said in a letter to shareholders.

Indeed, there's a strong case that online travel stocks are undervalued,
especially compared with other Web retailers. In addition to IAC and
Cendant, the big players are Priceline.com and Sabre Holdings, which
owns Travelocity as well as the Sabre reservation technology used by the
airlines. All four stocks trade at modest PEG ratios, a measure that
looks at the relative cost of a stock by dividing its current
price-to-earnings ratio (P/E) by its projected long-term earnings growth
rate (G). Amazon, eBay and even lesser shopping sites like eCost trade
at PEGs of about 2, while the online travel companies trade at PEGs of 1
to 1.4. Now, none of the Web travel agents have Amazon's leadership
status, and earnings growth rates, while healthy, aren't eBay-like, so
the stocks should be cheaper. Still, "the discount is probably too
great," says Mark Mahaney, an analyst with American Technology Research.

Mahaney's favorite play is Priceline.com (PCLN). No longer a niche site
where users set a price they'll pay and hope for a flight close to what
they want, Priceline now offers traditional travel options as well.
Gross bookings, or the dollar amount of tickets and services purchased,
are increasing faster than at its competitors. Earnings are also
expected to grow more quickly, at 20% a year.

If you can handle more risk, consider looking outside the U.S. to—where
else?—China. Five-year-old Ctrip.com (CTRP) is building a brand name in
online travel among China's rapidly expanding affluent class. The
company buys up blocks of airline tickets and hotel rooms in major
Chinese cities, then resells them to leisure and business travelers. The
stock, traded on the Nasdaq, carries a high P/E of 33 times 2005
earnings estimates, but projected earnings growth is high too: 38% a
year. Ctrip is already profitable, and operating margins were a stellar
43% last quarter. "Ctrip should continue to command a premium valuation
to its U.S. peers," says Ashish Thadhani, an analyst with Gilford
Securities. "It is growing faster and has unmatched profitability."

There are obvious concerns here. Ctrip is not only young, it's small;
sales were just $11.6 million last quarter. But 10 Wall Street analysts
cover the stock, so the pros expect the company to reach maturity. Any
Internet stock, of course, whether here or in China, carries risks. But
this trip could be well worth making.

Taking a Flier on Online Travel

[This article contains a table.  Please see hardcopy of magazine or PDF.]

Notes: As of Jan. 19. [1] Based on projected 2005 earnings. [2]
Five-year projections.
Source: Thomson/Baseline.

PRO: The sector is growing fast, and stocks look undervalued

CON: Competition is fierce, and any Internet business is risky