Is Expedia Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Expedia Inc (EXPE -0.83%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Expedia's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Expedia's key statistics:

EXPE Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q4 2010.

EXPE Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q4 2010.

How we got here and where we're going
Expedia doesn't come through with flying colors, as it has earned only four out of nine possible passing grades, one of which was awarded on a technicality as the decline in Expedia's free cash flow has been less severe than the decline in its earnings. Despite these weaknesses, the company's shareholders have enjoyed strong growth over the past few years, and the stock has touched new peaks since the financial crisis. Is this growth sustainable, or will the online travel agency discover that its stock's journey canceled on account of bad financial weather? Let's look deeper to find out.

Expedia's latest quarter came through with better than expected revenue and earnings per share The company noted substantial growth in room sales volume, which was 25% higher year over year, while gross bookings jumped by 21% to $9.1 billion. Fool contributor Dan Moskowitz notes that Expedia subsidiary Trivago saw huge year-over-year revenue growth of 85%, which boosted overall revenue growth by 4%. As the global travel market continues to gain momentum, Expedia's management has also raised its full-year earnings guidance for fiscal 2014 by between 13% and 16% year-over-year.

Fool contributor Brian Pacampara notes that Expedia should also benefit from increasing percentages of online travel bookings in Asia, which will be largely driven by its joint venture with Air Asia and its ownership stake in eLong, a leading Chinese travel website. However, Expedia continues to face stiff competition from priceline.com (BKNG -1.35%) and Orbitz Worldwide (NYSE: OWW), which crimped Expedia's revenue per room night throughout fiscal 2013, and wound up depressing revenue margins. Segment leader Priceline plans to spur growth through geographical expansion and promotions, while Orbitz has signed multi-year agreements with several travel-management and technology companies. Priceline has been expanding in emerging markets like Asia and Latin America, which have a much larger untapped base of potential travelers than does the U.S.

Expedia could also be hurt by factors beyond its control -- according to Searchmetrics, Google may have punished Expedia for posting "unnatural links" on external web pages, which could have reduced its visibility for travel-related searches by as much as 25%. To counteract this, Expedia has been trying to enhance its social media exposure with daily offers, and it also plans to push its mobile-originated bookings to 20% of total transactions this year. Trivago's is also helping Expedia compete head-to-head with Priceline in the metasearch travel space. However, Fool contributor Andres Cardenal points out that Priceline's agency business model gives it a competitive advantage over Expedia, which primarily relies on the merchant model, which forces it to offer deep discounts during harsher economic climates.

Putting the pieces together
Today, Expedia has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.