Is This Company Up IPO Creek Without a Paddle?

Kayak (NAS: KYAK) IPO'd last week, making it one of the few tech companies brave enough to hit the market in a post-Facebook world. The company was cofounded in 2004 by the creators of Expedia (NAS: EXPE) , Orbitz (NYS: OWW) , and Travelocity, and compares information from different travel websites to give you the best possible deal.  Let's see if Kayak has what it takes to make it a great company.

Is a kayak with a motor attached to it a speed boat?

Kayak's biggest advantage is how easy the site is to use on mobile phones.  Nobody wants to flip through dozens of pages of travel websites on their iPhone, but with Kayak, you don't need to; all those sites are on one clean and simple page for you to browse. This is one of the reasons why Kayak's mobile app has been downloaded 2.3 million times in the second quarter of 2012, a 40% increase from the same quarter last year. 


These aren't just random strangers downloading Kayak's app. The company has a very loyal customer base; around 75% of the people who visit the site come to Kayak.com directly. This is, perhaps one of the reasons the site saw a 42% increase in search queries during the first quarter of 2012. And with the ability to book trips directly from Kayak.com, the number of loyal customers should only increase. But it's not all smooth sailing for Kayak. 

Sprung a leak

One potential hazard is a little company named Google. In 2011 Google bought ITA, a tech company which created the software that checks flight times and hotel openings around the world. Simply put, it's the basis for every travel search site on the web. The potential bottleneck of information that Google could create if it chose to build its own search site, though unlikely, cannot be ignored.

Speaking of competitors, Google is only the first and biggest of the competition; there's also Expedia, Orbitz, Travelocity, Trip Advisor (NAS: TRIP) , Priceline (NAS: PCLN) , Hotwire, etc. There's little to no barrier to entry in this sector, and the companies already established are well known and well entrenched.  In order for Kayak to succeed, it needs to remain relevant, with innovations and expansions into new markets such as international travel.

Next, a lot of Kayak's future depends on external factors. For instance, the company is part of the leisure travel industry. This means that, if there's another recession and people cut back on leisure spending, specifically vacations, Kayak's bottom line could get decimated. 

Kayak's final weaknesses are its revenue sources. Kayak collects fees from other travel aggregators when someone books a trip through Kayak.com. It also makes money every time someone clicks an advertisement on its site. Both of these revenue streams depend on other businesses, meaning that if other travel sites want to change their fees or advertising budgets and want to pay Kayak less, there's very little that Kayak can do to stop them.

I've mentioned some of Kayak's competitors so far, but let's take a closer look at them so that we know what numbers Kayak needs to beat.

Company

Trailing P/E

Net Margin

Revenue Growth

Priceline 30 25% 22%
Expedia 18 9% 11%
Orbitz NM (4%) 3%
Trip Advisor 27 28% 28%
Industry Average 17 24% N/A

Source: The Motley Fool, Company Filings

Quite frankly, the sector isn't as tough as it looks. Orbitz's revenue growth, for instance, remains significantly smaller than Trip Advisor's, which looks pretty expensive compared to the industry average.  Meanwhile, Expedia has the lowest P/E of the bunch, but its margins are well below the sector average. 

Kayaks rule, canoes drool!

While other websites look at hotel prices and airline fares, Kayak looks at those websites.  People seem to like the company, considering that in 2011, Kayak's revenue grew 32%, while net income rose 21%.  That doesn't mean that it's the best investment for you, though, and it may be best to add Kayak to your Fool watchlist and wait for the company's first quarterly report. 

While you're waiting, make sure to check out this new premium research report on tech darling Apple. Inside, our top technology analyst walks you through all of the key opportunities and threats facing the company. He also provides regular updates, which are included for a full year. Click here to learn more.

The article Is This Company Up IPO Creek Without a Paddle? originally appeared on Fool.com.

Motley Fool contributor Mark Reeth could use a vacation, and might be on Kayak.com right this very moment. Follow him in all of his adventures on Twitter @ChristmasReeth. The Motley Fool owns shares of Google, TripAdvisor, Priceline.com, and Apple. Motley Fool newsletter services have recommended buying shares of Apple, TripAdvisor, Google, and Priceline.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.

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