EXPE: Expedia Has More to Fear Than the Google Penalty Box

On the surface, Google’s (GOOG) punishment doesn’t look like any more than a slap on the wrist for Expedia (EXPE), despite Tuesday’s pounding of EXPE stock. After all, JCPenney (JCP) and Overstock.com (OSTK) have both survived the same punishment.

expedia-EXPE-stockBut when you take a step back and think about the underlying vulnerability this wrist slap underscores for any and all companies, the setback becomes far scarier — and cuts deeper — than anyone might realize at first glance.

The punishment? In simplest terms, Google has lowered Expedia’s search engine ranking, meaning those who go to www.google.come and perform a web search for “cheap flights” are far less likely to find the Expedia site at the top of that search’s results page.

Specifically, trend-followers at web-traffic-research outfit Search Metrics say Expedia’s visibility via the popular search engine has fallen by about 25% since it was suggested the travel-booking company pays a few too many people to post a few too many links (at non-EXPE websites) that point back to Expedia.

Google’s Hit to EXPE: Not Fun, But Not Permanent

More links pointing back to a specific site suggest that site is popular and relevant, so Google is apt to present it higher in its listings when you search for a particular phase or term. When those links cross a proverbial line and reach spam-like proportions, though, GOOG makes an adjustment that can actually undo the effectiveness of the search-visibility effort (and then some) for an unspecified period of time … usually on the order of days, or weeks at the most.

EXPE appears to be in that penalty box now.

While neither company is making an official comment, Search Metrics has been a credible source for details on the what, when, how and why of sites being placed in Google’s penalty box before. The group had its finger on the pulse of Rap Genius’ punishment doled out late last year, and most everything it said about Interflora’s timeout was on target too.

Point being, is Search Metrics says Expedia is getting the cold shoulder from the search engine, then it probably is.

So now what? Truth be told, there’s not a lot Expedia can do about it, nor is there a great deal that EXPE stock owners have to worry about on this end. That’s because while the penalty might crimp revenue and earnings a bit for the current quarter, other companies have survived being sent to the penalty box as well.

Overstock.com, for instance, found itself out of Google’s good graces in early 2011 after a few too many links back to the shopping site were found at “.edu” websites. Educational sites are given preferential treatment in Google’s search algorithm, primarily because they’re (supposed to be) non-commercial sources of information. Getting a little too much traction for the wrong reason, however, the search giant weakened Overstock.com’s visibility in the Google search engine until most of those links had been removed. OSTK is on pace for a record-breaking year, sales-wise, so clearly Google is at least somewhat forgiving.

JCP was in the same penalty box that Overstock was at one point, and like OSTK, got out of it. When the popular bricks-and-mortar retailer saw enormous progress with its web-based sales in early 2011, a closer investigation found that many links pointing back to the retailer’s e-commerce arm were posted at completely unrelated websites. Lacking the true relevancy Google likes to see in those web links, the search engine made it more difficult to find JCPenney’s products online until about three months later when the company resolved the questionable approaches that landed it in hot water in the first place. Yes, the retailer is still hanging by a thread, but that has nothing to do with its e-commerce efforts.

The point is, Expedia can, and likely will, get past this dose of bad news. That’s why EXPE stock recovered so well Tuesday following the initial bearish jolt once the idea of the punishment was floated to the public.

Being sent to the penalty box for a few weeks, however, is the least of what EXPE stock holders — or an investor in any company, for that matter — have to worry about.

When Opportunity Knocks

While Expedia is apt to work past this hurdle just like JCPenney, Overstock and Rap Genius did, there’s clearly something unnerving about the fact that one company can ultimately decide your fate in terms of how easy it is to find another company online.

Indeed, for a company like Expedia that operates almost exclusively online, not appearing in Google’s top-10 search results for a given term (the first page of the query’s results) can be devastating … forever.

Sure, Google restored the search rankings for JCPenney and Rap Genius, and likely will do the same for EXPE once some things are corrected. There’s no guarantee it’s going to be so friendly in the future, however — especially when Google wades deeper into running more online businesses that compete with the very same companies that are jockeying for the top position via the search engine’s results.

Indeed, it’s more than a little interesting that an online travel-booking site is in the penalty box just a few days after it was strongly implied that Google is considering throwing its own hat deeper into the travel ticketing ring.

It’s true. Although not readily to many users, Google has been booking flights for visitors to the United Kingdom for almost a year now. A new partnership with Ryanair (RYAAY) will also funnel more flyers to the airline — directly from a search query — beginning in March of this year. More and more such relationships with airlines make sites like Priceline (PCLN) and Expedia less and less important to travelers, who are accomplishing all they need to accomplish directly through Google.

You’re not alone in thinking what you’re probably thinking right now:

“What if the algorithm changed for certain terms like “cheap flights” to favor Google’s partners’ deals a little more, and favored non-partner flights like Expedia’s or Priceline’s a little less?”

While the search engine’s stated mission is to return the most relevant results for any particular query, it’s interesting that searches for “gaming apps” and “music apps” both return Google Play as the first organic, non-ad result, while Apple (AAPL) has to pay to appear at the top (sometimes solely) of the ad results right above those two queries.

While Google’s apps have become numerous as well as popular, there’s no way to deny that Apple’s iOS app universe is still at least a relevant as Google’s. Yet, Apple somehow ranks No. 2 for the term “music apps” with a Google search, and ranks only No. 10 for “gaming apps.”

Something’s clearly not quite right.

That, or Google has used its knowledge of its own search engine with tremendous proficiency, while somehow its biggest competitor and the maker of the world’s most popular smartphone has missed the SEO mark.

Bottom Line

If Google really wanted to get into the travel game, it’s not unreasonable to suspect Expedia and/or Priceline could have the same amazingly bad luck Apple did once it started to compete with the search engine giant.

If you hold PCLN or EXPE stock, that’s a consideration you might want to tuck away for a later date.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2014/01/expe-stock-expedia/.

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