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Online Travel Industry Getting Squeezed: Kayak vs. Priceline
Posted by: Matthew Indyke and Brian Zen (IP Logged)
Date: August 16, 2012 11:36AM
Does the plunging stock price of decade-old online travel companies like Priceline (PCLN) suggest their model is outdated and losing value? Is a more modern online travel company like Kayak (KYAK) a hot newly listed stock for investors? Investors are wondering whether to keep their money in a stock like Priceline that is sinking or risk putting it in a newer company like Kayak, whose future as a public company is uncertain, at best. The bottom line: Is investing in an online travel company, old or new, a risk worth taking or is the industry too unpredictable to be consider as a safe investment?
What Priceline’s Decline Means?
Priceline, at one time, was one of your greatest investments if you put your money in it between 2008 and 2010. It was the number one travel website that users visited. That is, until newer companies broke into the industry and found a better way of doing things. Once the new companies started winning over consumers, Priceline began to lose its flair.
Priceline’s stock was as low as $51.95 in October 2008 and it kept rising higher and higher until reaching its peak at $774.96 this year. Eventually, investors decided it was the right time to sell and down went the stock to $566. While this is still a high price for Priceline, the rate at which the price is dropping suggests its high-riding days in the stock market could be ending. Although Priceline sits well-above its 52-week low of $411.26, if it continues to drop, it may very well sink below that number as well. Despite the recent plunge in its share price, Priceline is not a value stock; at 24 times earnings and 6 times revenue, it is a growth stock and will continue to be for a while.
Priceline’s future could be in trouble for the following reasons:
Kayak, an online travel website that started in 2004, created a layout and model that made it more attractive for users. Because its website is more geared for price comparison, Kayak has been threatening the existence of older companies since becoming popular with users in the late 2000’s. And the founders of Kayak happen to be the cofounders of Expedia, Orbitz, and Travelocity. Their mission was to take a different approach to online travel by enabling users to compare prices on hundreds of travel sites at once (Expedia, Orbitz, and Travelocity included), in one fast and intuitive display to find the best deal. Kayak, nowadays, has become a provider of online travel offers and services from hundreds of other travel websites via its website.
Unlike online travel agencies that started earlier, Kayak does not provide online bookings directly but gives consumers a one-stop research solution to best fares along with other value-added services like flight status updates and pricing alerts. By providing an easy comparison of fares across various websites, Kayak makes the travel search easier for its users. People who use Kayak find they never need to leave the site to check if they are getting the best deal on their bookings. All the information they need is right there in front of them.
Since entering the public market at an IPO price of $26, Kayak has seen its price rise as high as $35 and has yet to fall below its IPO price. Still, there are rumblings that Kayak’s stock is overvalued and that investors are being advised to avoid it. Shares have dropped to new lows, down 10% to $26.42, as the underwriting banks first published their views on the online-travel company. Three gave the stock a hold, saying shares are already on the mark, and two gave it a buy. Here are three reasons to be cautious on Kayak and as you see, they all primarily relate to its future revenue stream:
Disclosure: The authors have no position in the stocks mentioned.