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It's been a long time coming but Kayak (NASDAQ:KYAK) has updated its IPO filing and is headed out for open waters. The S-1 was filed back in November of 2010. The deal has been delayed multiple times due in no small part to a lack of company maturity, increasing competition from Google (NASDAQ:GOOG) with its acquisition of ITA and somewhat risk averse market.

It's possible that the bankers at Morgan Stanley (NYSE:MS) are watching too many episodes of Mad Men but they obviously feel that the company is ready and the timing is right. It does appear that the major VC investors (Oak, General Catalyst, Sequoia and Accel) want to see the company public and are even willing to purchase more stock to absorb some supply from selling shareholders and support the offering.

But Kayak has executed its way into contention with solid growth numbers, expanding profit margins and a some renewed technology leadership, particularly in mobile where they now have a strong position on both the iPhone and Android.

We have some long-term concerns regarding Kayak from a technology perspective but its projected growth and profit margins make the deal reasonably attractive. A "success case" of our IV model incorporating the mid-point of management targets suggests a share price of $40. We also ran a somewhat pessimistic version of the model to which yield an IV of $16 to $18. Even with much slower growth and higher costs the margins in the business remain healthy.

Plenty of Market Opportunity

First of all online travel search, booking and advertising is indeed a large market. Like many industries the travel business has learned over the past ten years they were spending a ton of money on customer acquisition by doing it themselves. Initially they hated the online travel booking sites but realized that online booking was cutting its customer acquisition costs in half (from 20% at the start to about 10% today).

Counting up just the public companies in the peer group online travel booking revenue was over $11B last year and the companies have a combined market capitalization of almost $50B. Kayak has a small share ($225M LTM revenues) in this market where the average YoY growth is 25%. The company has adequate room to grow for years.

Company Facets

Kayak is a small company of 200 people focused mostly on technology to integrate all the different data in to one place to be a kind of "meta search engine" to compare options across an array of providers.

After flat revenue in 2009 the company has gotten customer religion and focused on its mobile strategy where they are achieving strong brand awareness and usage. Competitive focus is on ease of use, comprehensive results, and ability to "out innovate" other companies. We're going to come back to technology but this has been true vis a vis the airlines and other travel companies but may or may not stand up in looking at Priceline (NASDAQ:PCLN) or Google (GOOG).

Kayak is investing in building its international business which is 18% of revenue compared to being 60% of worldwide travel bookings. Kayak is seeing results with growth of circa 100% growth of international so we expect their level of investment there to continue.

Key performance indicators (KPIs) include revenue, repeat visits, completion of bookings. Get paid on comparisons, commissions on bookings and advertising on display ads. Kayak does get a higher commission if the booking is completed on Kayak versus other sites. This new "booking path" is being added to more suppliers and travel categories and can help drive margins higher over time.

Marketing spend is really the giant lever in the business in terms of driving traffic and the ability to convert that traffic to revenue the governor of future returns on invested capital.

Management Team

Steve Hafner the cofounder and CEO certainly knows the industry based on his success at Orbitz (NYSE:OWW). His cofounder and CTO Paul English has a solid career in technology including stints at InterLeaf and Intuit (NASDAQ:INTU). The two founded Kayak in 2004 so have worked together for quite some time. The other senior members of the core technology team have been with the company since the beginning. The current CFO was recently promoted from within after a little over two years as the VP of Finance and IR. This was done as the existing CFO departed for another startup in the online travel space.

The board includes the president/CEO of Travelocity, the former CFO of Expedia (NASDAQ:EXPE) and the cofounder and CEO of HomeAway (NASDAQ:AWAY). In addition senior representatives of the VC firms (Sequoia, Accel, and General Catalyst) serve on the board.

Overall we give the management team and board fairly high marks but wonder if they haven't been together too long and if their mental models around new technology might be dated. We're seeing a pronounced shift in technology use cases today that might demand some radical new thinking in the next few years.

Lots of Technology Questions

First the good news - most of the competition, including Google , has done a fairly lame job in the travel space. A quick visit to "Google Travel" makes it immediately obvious that Google has invested about $10 in providing functionality and design on top of the ITA data and search asset they acquired.

So far most of the online travel sites are similar and Kayak continues to have one of the easiest to use and most comprehensive offerings, even if most of the booking is done off-site. We even had a quick look at the online startup that the prior Kayak CFO left to join, Superfly.com, and can say that it's no major leap forward. The wrinkle there is mostly about using award miles more effectively which is fine but not exactly a blockbuster.

Our real concerns about Kayak come in the form of future technologies we see on the horizon that will disrupt this whole approach of "search, refine, click, repeat until exhausted or you bite the bullet and book something." Like search in general we expect that booking of travel will become more voice-based and interactive. It will also involve a combination of tight coupling (frequent flyer/stayer miles, hotel/car/flight) and loose coupling (HomeAway (AWAY), AirBnB, Zipcar (ZIP), dog walking, Opentable (NASDAQ:OPEN)).

The shift in functionality, information sources, booking models and interactivity will probably come along with a new platform and that puts Kayak in a position of both opportunity and risk. So far we haven't seen the kind of breathtaking technology innovation and rapid product introductions that would give us the confidence to say that Kayak will be "first and best" of this new breed.

Financials and Valuation

Target financial model is 25% revenue growth (down from 40%), 93% gross margin (NYSEARCA:FLAT), 40-45% marketing (down 4-9%), SG&A 18% (down 2%) to reach AdjEBITDA margins of 30% from the current 22%.

Q2 showed more deceleration 304 queries +33%, 75M in revenues 32% growth, AdjEBITDA up 70% YoY. Improved booking paths for rental transactions and more good performance on mobile.

We've provided both a low and a high IV case showing upside to $40 with downside to about $17. The proposed pricing range puts the shares at about 4.4x sales which is line with the 4.3x average for the group. As can be seen in the peer group a few names like Priceline , TripAdvisor (NASDAQ:TRIP) and HomeAway trade at substantial premiums based on their above average growth and margins.

Click the PDF images below for larger versions.

Source: Kayak IPO Finds A Lane Through White Water