Kayak Worth $800 Million but Google-ITA Deal Is a Concern

Includes: EXPE, GOOG, PCLN
by: Trefis

We recently launched coverage of Kayak with a roughly $800 million valuation. Unlike online travel agencies like Expedia (NASDAQ:EXPE) or Priceline (NASDAQ:PCLN), Kayak (KYAK) does not provide online bookings directly but provides consumers a one-stop research solution to best fares along with other value-added services like flight status updates and pricing alerts.

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.

Here’s the Skinny

Kayak is a technology-driven company founded in 2004 by the co-founders of Expedia, Travelocity and Orbitz. In addition to the strength of the management team, the investors include some of the most prominent venture capital and private equity firms, including Sequoia Capital, Accel Partners, General Catalyst Partners and Oak Investment Partners. As of October 2010, Kayak had 140 employees with local websites in 14 countries outside the US, including UK, Germany, Germany, France, Spain, Italy and India.

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.

We have broken the company down into 3 primary divisions.

1) Advertising

2) Hotel Referral Fees

3) Airline Ticket Referrals

Concerns on Google-ITA Deal Can Impact Kayak

Kayak filed an S-1 statement with the SEC for a proposed initial public offering expected in mid-2011. However, Google (NASDAQ:GOOG) announced its intentions to acquire ITA Software, a provider of online travel faring information, raising some concerns for Kayak’s outlook. ITA Software licenses its faring software to Kayak, and this agreement will expire 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.

An additional risk is with Google in charge may be that ITA could refuse to continue working with Kayak and similar providers – or do so with unfavorable terms. Some have suggested that the IPO may provide a way for the investors to cash our or reduce their exposure to Kayak.

We await further details as the IPO approaches.

See our full valuation analysis for Kayak.

Disclosure: No positions