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Travel industry ad wars hurting Expedia, Priceline and TripAdvisor stocks

Investors have given the online travel sector a haircut after the largest three companies posted disappointing results.

The three largest names in online travel—Expedia Inc. TripAdvisor Inc. and Priceline Group Inc.—have seen their shares dip after third-quarter earnings reports, in part because the companies seem to be planning an increase in advertising spending.

Priceline Group Inc.

Online travel agencies are essentially large marketing companies that are not really in the travel business—which involves running actual amenities such as hotels or airlines—so they spend big on online and offline ads. By way of example, Priceline, the largest by valuation of the three, spent $1.15 billion on performance advertising in the second quarter, up from $920 million in the year-earlier period. On top of that, executives spent another $121 million on brand advertising, and $131 million on sales and marketing, according to financial statements.

Ads are seen as essential to driving the reservations business that accounts for the vast majority of these companies’ revenues. So when online travel firms are forced to spend more, the bottom line can often take a hit, and all seem to suggest higher costs or a new approach going forward.

“[Priceline Chief Executive] Glenn [Fogel] just discussed steps we are taking to optimize the efficiency of our performance advertising spend, which we forecast will have a modestly negative impact on top-line growth for the coming quarters,” Priceline Chief Financial Officer Daniel Finnegan said on the company’s third-quarter call Monday.

Finnegan also pointed to the size of Priceline’s business as another factor in the company’s slowing growth.

For its part, TripAdvisor did not provide forward-looking revenue guidance in its third-quarter earnings release, but did offer a statement about its outlook for ad spending.

“Recent partner bidding trends and our reallocation of dollars away from online channels with short-term payback will cause click-based and transaction revenue growth to slow further in Q4,” the company said.

Analysts may ask executives about the guidance in TripAdvisor’s conference call, which is scheduled for Tuesday morning before the open.

Like its two rival companies Expedia is also ramping spending on ads, executives said on the company’s third-quarter call in October.

“We continue to lean into performance-based marketing channels and are ramping up investments in our hotel market management sales force, both of which put pressure on our bottom line performance near term, but both of which we believe are the right investments for the long-term,” Chief Financial Officer Alan Pickerill said then.

While all three companies’ valuations were falling Monday evening, the stocks have been performing differently this year. Priceline stock is up 29.8%, TripAdvisor stock is down 14.8%, and Expedia stock is up 8.6% in 2017, while the S&P 500 index SPX, +0.13% is up 15.7%.