Kayak Valued at $800 Million on Advertising Growth

Kayak comes to the rescue for the leisure traveler looking for the 'best deal' on airline, hotel, car rental or cruise bookings made over the Internet. Unlike online travel agencies like Expedia (EXPE) or Priceline (PCLN), Kayak does not provide online bookings directly but provides users a one-stop research solution to best fares along with other value-added services like flight status updates and pricing alerts.

Kayak facilitates the quick and easy comparison of fares collected from hundreds of travel websites (both suppliers' and online travel agencies' websites) and, once the user makes a selection, directs the customer to the appropriate website to complete the purchase.

While Kayak's services are free for travelers, Kayak earns revenues from advertising placements on its websites and mobile applications as well as referral fees from travel suppliers and online travel agencies.



You can scroll through the slide show above to see the key drivers to Kayak's value. Drag the trend lines to see how changes in various forecasts impact the price estimate.

Launch of Coverage on Kayak; $802 Million Value Estimate

We're launching coverage of Kayak with an $802 million equity value estimate. We believe advertising revenues make up over 60% of Kayak's valuation while referral fees from hotel queries and air ticket queries constitute 21% and 14% respectively.

Kayak filed an S-1 statement with the SEC for a proposed initial public offering expected in mid-2011. However, the uncertainty over Google's on-going acquisition of ITA Software, a provider of online travel fare information, presents serious implications for Kayak's business and casts uncertainty on Kayak's long-term value.

How the Google-ITA Deal Can Impact Kayak

ITA Software licenses its faring software to Kayak, under an agreement that expires in December 2013. The faring software accounts for 42% of Kayak's overall airfare query results.

Airline travel queries account for 85% of the total searches performed on Kayak's websites and its mobile applications. Hence a loss of access to ITA's software could have a significant adverse impact on the comprehensiveness of query results and, consequently, on the company's revenues and operating margins.

During July 2010, Google (GOOG) announced an agreement to acquire ITA. If completed, Google could create its own flight search tool to enable users to find comparable flight information on the Internet without using Kayak's services. Also, Google may not renew ITA's current agreements with the online travel agencies like Kayak, or may only do so at unfavorable terms. Kayak admits that it is unable to replace ITA with a comparable technology and hence, its business and financial performance might suffer should the ITA acquisition go through.

Should the Timing of Kayak's IPO Raise Concerns?

In addition to the strong management team comprised of co-founders of Expedia, Travelocity and Orbitz (OWW), Kayak's investor base includes prominent venture capital and private equity players like Sequoia Capital, Accel Partners, General Catalyst Partners and Oak Investment Partners.

Given the potential significance of a successfully closed Google-ITA deal, we expect the street to heavily discount Kayak's future outlook, reducing its perceived valuation. Further, the S-1 filing with the SEC could indicate current investors' eagerness to unload their equity stake.

See our full valuation analysis for Kayak.

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