ROOM At The Top

Since the first big pop in the Internet bubble was heard back on March 14, 2000, every major Internet company has seen its share price fall or, more typically, plummet. Except one – Hotel Reservations Network.

Shares of the online hotel room discounter are up 32% from that first dark day of last year, closing Monday at $26.48. And though ROOM stumbled last April, dropping as low as $14.50, by June it was back over $25 to stay, rising as high as $42.63 in mid-September.

Finally, though, it appears gravity may be catching up to Hotel Reservations Network. Since closing at $39.94 on Jan. 29, shares of ROOM have lost 33.7% of their value and have spent most of March trading in the $25-$27 range.

Like other ‘Net tickers, ROOM has been mauled by the bear market. But the company also is overpriced, with a P/E ratio of 133x, about five times the average for the personal services industry. (You can find these and other ROOM valuation ratios on the company’s investor relations Web page.)

Still, ROOM has fooled investors before, falling from prices above $35 per share to just around $25 three times in the past nine months, only to quickly recover and head north again. Unlike the vast majority of ‘Net stock charts that resemble downhill ski runs, ROOM’s chart over most of the past year looks like a mountain range, with several peaks grouped closely together.

One thing that has helped keep ROOM aloft is its profitability. Net income in Q4 was $5.2 million, or 9 cents per share, up from a net loss of $1.9 million, or 3 cents per share, in the year-ago quarter. Annual net income was $10.8 million, or 20 cents per share, up from a net loss of $12.8 million, or 24 cents per share, in 1999.

Which all sounds great for an Internet company. So too does ROOM’s annual revenue, which more than doubled in 2000 to $328 million from 1999’s $162 million.

However, revenue growth is de-accelerating. Fourth-quarter revenues of $100 million were only 87% more than Q4 sales in 1999. And slower revenue growth (and, in some cases, declining revenues) is what the vast majority of Internet companies are experiencing.

Given that ROOM shares actually rose in the days following release of Q4 numbers, it doesn’t appear the company’s sales slowdown unduly bothers investors.

On balance, ROOM’s financial numbers would be the envy of most other Internet companies. But the figure that really counts – the P/E ratio – eventually should force shares below that $25 barrier.

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