Priceline's Secret Sauce: European Hotels

Priceline.com's stock is up nearly 100% for the year, despite slower consumer spending in travel.
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NEW YORK (

TheStreet

) -- Some investors might think that

Priceline

(PCLN)

would have trouble performing well during the Great Recession. After all, consumers are spending less and due to high unemployment, fewer people have the disposable income to travel.

But Priceline has proven those people wrong.

In the second quarter of 2010, Priceline posted revenue of $767.4 million, a 27.1% increase compared to the same quarter a year ago. The company turned a gross profit of $445.3 million, representing a 45.9% increase year-over-year. Its ultimate net income for the second quarter was $115 million, nearly double the $67 million profit it generated last year.

Priceline isn't alone in its success.

Orbitz

(OWW)

and

Expedia

(EXPE) - Get Report

, Priceline's two biggest competitors, also performed well in their respective second quarters.

The competition, however, doesn't worry Priceline all that much. Over the past five years, Priceline has watched its operating margin soar from around 3% in 2005 to over 22% in 2009. And with its profit margin hovering at around 21%, it's not hard to see why the company's stock price has exploded over the past few years.

At the beginning of 2009, Priceline's stock price was at $76.89 per share. As of this writing, the company's shares are trading at $296.80. Compare that to Expedia's $23.72 price and Orbitz's $4.95 price, and it quickly becomes clear that investors are finding a lot to like with Priceline.

Priceline's success can be attributed to the aggressive strategy its CEO, Jeffery Boyd, has employed since he took over the company in 2002.

At that time, Priceline was in shambles. The company's shares were rocked by the dot-com burst and investors were losing hope in the online travel agency. But Boyd, realizing that the future was rooted in international markets, took to the high seas to turn his company's business around.

Going International

The result was an aggressive expansion with acquisitions of European travel-booking services, like

Active Hotels

and

Booking.com

in 2004 and 2005, respectively. In 2007, the company acquired

Agoda

, a travel agency that caters to those traveling throughout Asia. More recently, Priceline acquired

Travel Jigsaw

, another European travel agent.

Upon doing so, Priceline has watched its international booking drive the majority of its growth. According to its latest filing, the company nearly doubled its revenue in international markets, compared to U.S.-based bookings. Its year-over-year growth in bookings was 59.5% globally, compared to 19.6% in the U.S.

Orbitz's domestic revenue is nearly three-times higher in the U.S. compared to international markets. Expedia's domestic bookings are nearly double its international fares.

Going forward, it seems that Boyd believes his company can capitalize even more on the international market. "In my opinion,

the international market is a giant market, it's under-penetrated in terms of online versus offline compared to the United States, and it really doesn't have the same degree of fully developed online travel agent competition at work there," he said on a recent earnings call.

Zeroing in on hotels

Another key aspect of Priceline's William Shatner-hyped business is that it focuses most of its effort on hotels.

According to the company, it offers deals on more than 100,000 hotels in 98 countries around the world. Expedia's Hotels.com, on the other hand, offers approximately 70,000 hotel options.

In the company's first quarter earnings call, Boyd was quick to point out that distinction. He said that during the first quarter, his company booked "20 million room nights worldwide." He claimed Priceline's "nearest competitor did 16 million. We are operating on a business that's really quite a bit larger," Boyd said during the call.

Of course, that doesn't mean that Priceline can't run into trouble. The company is fully aware that global economic conditions can have a substantial and negative impact on its business. As Boyd pointed out, Priceline is "concerned that government deficits and consequent austerity measures could impact economic recovery and travel demand in the future."

Plus, with volatility in the currency markets, the internationally-tied Priceline is seeing, and will continue to see, "volatility in

its translated results."

That said, it's tough to bet against Priceline. The company's sales are on the rise, its stock price is up. And thanks to smart investments, its growth in the burgeoning international market continues to impress. Perhaps that's why most analysts agree that going forward, Priceline will do well by investors.

"We continue to view Priceline as one of the best growth assets in the Internet sector," Citigroup analyst Mark Mahaney wrote to investors this month.

--Reported by Don Reisinger in New York.

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Don Reisinger has been writing columns and blogs about the technology and video game industries for years. His work appears in some of the tech industry?s biggest publications, as well as in the

Los Angeles Times

, where he blogs about social networking. Follow Reisinger on Twitter @donreisinger.