Kayak (KYAK) went public in an IPO at $26 on Friday. This price was above the original $22-$25 range and raised $91M for the company. The stock opened up 15% at $30.10 and now trades in the $33 range.
The company proclaims itself as the best place to plan and book travel. The basic focus of the company is to enable people to easily research and compare accurate and relevant information from hundreds of other travel websites in one comprehensive, fast and intuitive display.
The initial thought when the company filed to go public was that of just another internet travel company. My past experience on the website wasn't that impressive though my last visit went back a few years. At the time it was vastly underwhelming to use or at least that was my experience.
Fast forward to the IPO roadshow and the story appears completely different. Kayak claims the number one smartphone app and number two tablet app for the travel industry. My iPhone lists only hotels.com as being more popular for the free apps.
The CEO made a profound statement that might solidify the investment potential in this stock. Mainly that mobile travel users aren't as willing to review multiple sites. Unlike a desktop or even a laptop, mobile functionality doesn't allow the same ability to search multiple sites making the use of Kayak.com that much more appealing.
The company competes in both the online travel market and the online travel advertising market.
Online Travel: The global travel industry accounted for $910B in 2011 and is projected for modest growth going forward. The online portion was only $284B or just 31% of the total market. Naturally airline ticket sales and hotel bookings account for nearly 80% of the total revenue.
Online Advertising: Travel represents one of the largest advertising categories with over $33B spent globally in 2011. Of this amount only $5B was spent online leaving room for significant growth. The market is expected to grow to $9B by 2015, a CAGR of 14% from 2011 to 2015.
Though the company now offers booking services directly via its website, it doesn't face a lot of similar competition for comparison shopping. The main competition are the travel websites directly or offline booking via travel agencies still common in international locations. If a travel user wants to do online comparison shopping, Kayak offers the solution which is more dominant in mobile.
For the three months ended March 31, 2012, it generated $73.3M of revenues for 39% growth. The company generated income from operations of $8.1M and adjusted EBITDA of $13.2M.
For the three months ended June 30, 2012, it expects to report $74.5 - $76M or 31-34% growth. This growth is a considerable slower rate than in Q1. On the other hand, income from operations is expected to jump up to 150% at $13.4-$14.4M.
The mobile applications remain hot with approximately 3M downloads for the three months ended March 31. This represents a robust 43% growth rate.
Kayak offered 3.5M shares at $26 to raise $91M. An over-allotment of 525K shares would raise another $13M.
Per the S-1, the company will also raise another $9.2M in a concurrent private placement from existing shareholders. At the IPO price of $26, the placement will issue roughly 353K shares.
The fair valuation of IPO stocks are always difficult to derive. The prospectus lists 38.5M shares outstanding after the IPO though this excludes over 9M stock options that can be exercised at prices between $10.65-$13.57. Though those stock options will raise another $90M over the years, it will also significantly dilute outstanding shares. For example, the Q112 report already showed 37.3M diluted shares. After the IPO and private placement, the diluted shares will jump to over 41.5M.
Below is a financial comparison of Kayak to the other publicly traded competition.
Figure - Valuation Comparisons
|Company||2012 P/S||2012 P/E|
* Assuming 35% growth in 2012, Kayak will produce $300M in revenue for the full year after reporting $224M in 2011. At a price of $32.5, the company would have a market cap of $1.34B using the 41.5M diluted shares listed above.
** Kayak earnings are difficult to forecast. The Q212 preliminary numbers from the company suggest a huge increase in leverage and hence profits. Even if the company could produce $0.75-$1 in earnings for 2012, the stock would be expensive compared to this sector.
This stock is relatively attractively priced even with the after market 25% spike to over $32.50. TripAdvisor is probably the best comparison to this stock and trades at a substantially higher revenue multiple. The question remains how well Kayak can continue leveraging the growth with reduced cost margins as it forecasts for Q2.
Using TripAdvisor as an example, the first earnings report as an independent company was highly disappointing [see TripAdvisor Takes Investors On A Wild Trip] though it ended up providing a great entry point.
Investors wanting to rush into Kayak should use this as an example of the pitfalls of investing prior to the first public earnings report. TripAdvisor caught investors off guard with higher expenses. Sure it has since surged higher, but investors need to be aware.
As a leader in mobile and the future potential for international growth where many markets favor mobile traffic over desktop, Kayak could be riding a secular trend to higher profits. This stock will be attractive on dips.
Disclaimer: Please consult your financial advisor before making any financial decisions.