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How Much Is Kayak (KYAK) Truly Worth?

We’ve seen it before.. A hot tech IPO that is web related turning public amid some hype. While Kayak will not generate anywhere near the level of attention that Facebook ($FB) got a few months ago, myself and many others have still been anticipating Kayak’s IPO. Why? The obvious starting point is that the company has a great product in a growing market. I also find it very helpful to have other online travel companies being traded which makes it much easier to estimate its valuation, especially when trading long & short trades. Kayak should start trading very shortly and while it’s difficult to know how much the first few trades will occur at, I would guess that following the $FB IPO, the underwriter Morgan Stanley will be very motivated to ensure that things go smoother (i.e. there is a decent pop on the IPO day). It is currently being reported that shares will be priced between $22-25. Then again, Kayak was supposed to turn public several months ago and has been postponing in order to get more favorable conditions. I don’t think it was able to get those but given all of the uncertainty, it could take a while so I guess now is as good of a time as we will have for a few more months.

Kayak (KYAK) Financial Analysis

As is the case with the analysis of any IPO, there is only limited publicly available information. Let’s go with what we have. In terms of annual sales and earnings per share, the numbers are as follows:

YearSales
2008112
2009112.7
2010170.7
2011224.5
sales.png

YearEPS
2008-1.37
2009-0.92
2010-0.57
20110.93
eps.png

And we do have the past 9 quarters as well as the expectations for Q2 2012 from Kayak (I used the middle of their range for both sales and earnings):

sales2.png

eps2.png

Shareholders

The top companies selling will be ones you’d expect for most web related IPO’s so Sequoia Capital, Accel Partners and General Catalyst which is Kayak’s biggest shareholder.

Other Points Worth Noting

-Strong Product: You would think that travel search would be a fairly simple business but from the experience of so many users that I know, Kayak has been the one strong product available. It offers more flexibility but more importantly better results.

-Strong Brand: Kayak is one of the stronger internet travel brands and has thus been able to grow quickly with little advertising, through word of mouth. It has also made Kayak the first stop (and often only one too) in traveler’s search for flights, hotels and more.

-Weak Community: While some competitors such as Travelzoo (TZOO) have access to user emails, a much more personal way that creates better customer retention and TripAdvisor (TRIP) has been able to build a strong community, built off of Facebook’s infrastructure, Kayak has not put much focus on that. The issue that creates in my opinion is that its downfall could happen much more quickly as users would simply move on if better products emerge from Kayak’s competitors.

-Existing And Emerging Competition: In what is already a very competitive space, with Priceline (PCLN), Orbitz, Expedia, TripAdvisor and many other smaller players, there looms the threat of a much stronger competitor. Google was able to buy ITA, a company that gives access to a database of flgihts and potentially gives Google the ability to both build a much stronger search engine but also shut out to some extent competitors such as Kayak. It’s unlikely to happen overnight but there is no doubt that Kayak and others lobbied hard for antittrust authorities to veto the deal.

Valuations

In the end though, it comes down to valuations. First off, let’s take a look at the main competitors:

TickerNamePriceEPSPE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBeta
CTRPCtrip.com International Ltd15.671.1914.6410.7-34.3227.313.181
EXPEExpedia Inc45.622.3914.5613.758.313.693.561.01
PCLNpriceline.com Inc647.8121.2729.6216.3538.6941.194.641.12
TRIPTripAdvisor Inc44.391.33N/A24.2177.5531.453.42N/A
TZOOTravelzoo Inc21.640.217.1913.24-9.831.534.51.45
MMYTMakeMyTrip Ltd14.110.276.83N/A-41.5157.634.60.86
OWWOrbitz Worldwide Inc4.3005-0.36204.59.38.781.232.820.89
I would personally argue that given its growth in recent quarters, its outlook, and risks involved, the company should be trading at a P/E of a bit under 20.

A P/E of 20 over the EPS of the past 3 quarters + estimate for Q2 2012 would give me a value of $29 or so per share.

I’d love to hear your thoughts on Kayak ($KYAK).. Do you think I’m way off?


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