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Kayak and Groupon: A Tale of Two Web Sites

NEW YORK ( TheStreet) - On Thursday, Kayak Software (KYAK) surprised investors by agreeing to be sold to Priceline.com (PCLN - Get Report) for $40 a share just months after a July initial public offering. As tech investors took in the news, Groupon's (GRPN - Get Report) expected third quarter earnings miss pushed shares in the daily deals giant to all-time lows.

The two announcements shouldn't be seen in isolation.

Tech investors should take Kayak Software and Groupon's diverging fortunes as a lesson in how to discriminate between business models that work and those that are still unproven.

The comparison highlights that a focused excellence wins out over revenue growth or scale, and can be more easily translated into earnings.

In both its appeal to consumers and to strategic acquirers like Priceline, Kayak Software offers differentiated services in an online travel market that's rife with competition from the likes of Priceline, Orbitz Worldwide (OWW), Expedia (EXPE), and more recently, Google (GOOG) and Microsoft (MSFT - Get Report).

Compare Groupon to its primary competitor, LivingSocial, and the Chicago-based daily deals site appears to only have an advantage in the breadth of its offerings, the size of its overhead and its ambition to enter highly competitive markets. The difference between Kayak and Groupon is between a company with a targeted path to growing profitability, and one that's chasing revenue and cutting at margins.

Kayak's biggest breakthrough was its early adoption of meta-search - a quick way to aggregate listings from scores of airlines, hotels and competitor travel sites. More recently, the company made a big effort to build direct relationships with airlines, resorts and rental car agencies, as copycats emerged.

Since a mid-2000s launch, Kayak's held onto differentiating travel search functionality that gave it a value proposition to survive competition and grow a loyal following. According to Sequoia Capital, an early Kayak investor, it's like comparing Google's challenge to Yahoo! (YHOO) in the Web search market over a decade ago.

In fact, when Microsoft and Google entered the travel search market, they borrowed heavily from the software model that Kayak had used to carve out a niche and win millions of loyal users. Still, Kayak's standing with consumers - and increasingly with travel providers - warded off the competition.

As a result, Kayak's been able to tread a fairly consistent path to record profits, improving operating margins and increasing user loyalty. In the past four quarters, year-over-year gross margins and net income have been on the upswing. Earnings on Thursday were a record for the company.

In a blog post congratulating Kayak, Sequoia Capital detailed the company's ability to break ground in a crowded marketplace . Michael Abramson, a partner at the venture capital firm, highlights Kayak's early adoption of software to aggregate search results and its ability to shift focus to marketing and proprietary relationships when its edge wore thin.

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