Wall Street's Favorite Travel Site: Priceline

For consumers, online travel sites like Priceline, Orbitz, and Expedia all do roughly the same stuff. You probably still book through the one that first captured your credit card number or you use a metasearch engine like Kayak to search more widely for a good deal. They seem like commodity businesses, and as we'll see, in the U.S., they mostly are.

But for Wall Street, there is a clear winner in the online travel wars. In the past year, Priceline's stock price is up almost 90 percent, while its competitors have flatlined (Expedia) or lost value (Orbitz).

Over the past five years, the trend is even more striking. While Orbitz is down 60 percent and Expedia's up 44 percent, Priceline's stock price has increased 16 fold (that's 1,600 percent). And it's not just revenue or earnings growth driving that progress. The market now values Priceline at 36 times its earnings. Expedia merits a a mere 17.5 P/E ratio.

So, why is Priceline a Wall Street darling? No, it's not William Shatner. A big part of the reason is that they're not nearly as exposed to the American consumer and our hypercompetitive market. Seventy percent of Priceline's bookings and 82 percent of their operating income comes from the international part of their business, according to the quarterly report the company released this week. The money in online travel, it turns out, is booking hotel rooms in Europe.

"Given that the business of our international operations is primarily comprised of hotel reservation services, commissions earned in connection with the reservation of hotel room nights represents a substantial majority of our gross profit," the report states.

The company also appears well-positioned to take advantage of online travel booking growth in Asia, which always makes investors happy.

As for the issues that matter to you, there is a reason that we all think Priceline, Orbitz, and Expedia are all basically the same: they are. Even Priceline now admits that since early last last year, there has been no real price differentiation between the sites.

"Our business may be adversely impacted as a result of no longer having a price advantage over our direct competitors in the U.S., and we may be adversely impacted by future promotional initiatives by our competitors," the latest report states.

But don't worry, when a technology business gets commodified, there's always advertising!

"Increased shopping behavior reduces our advertising efficiency and effectiveness as traffic obtained through online advertising becomes less likely to result in a purchase on our web site," they admit. "Therefore, online advertising expenses for our priceline.com U.S. business have increased at a faster rate than gross profit, a trend which we expect to continue."

To translate for the layman: expect to see a lot more ads touting largely illusory differences between online travel services.