Unlike online travel agencies such as Expedia (NASDAQ:EXPE) or Priceline (NASDAQ:PCLN), 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. Kayak is a technology-driven company founded in 2004 by the co-founders of Expedia, Travelocity and Orbitz. By providing an easy comparison of fares across various websites, Kayak makes the travel search easier for its users.
Kayak does not charge any fees from its customers but earns its revenues primarily through advertising and referral fees earned from its suppliers. We estimate the advertising division to contribute close to 55% to our price estimate of $31.05 for Kayak, and the combined referral fees from hotels, airlines, car rentals and cruise referrals to contribute around 38%.
Having delayed its IPO for around 20 months on account of weak macroeconomic conditions, the company started trading under the "KYAK" ticker on NASDAQ from Friday onwards. We have a price estimate of $31.05 for Kayak, which is at a premium of close to 20% to the current market price.
We estimate that the company earns higher revenues from advertising compared to referral fees per query. Within referral fees, hotel booking offers the highest distribution revenue per 1000 referrals as compared to airline tickets, car rentals and cruises.
Higher Distribution Revenue Per Query Than Referral Revenue Per Query
We estimate that in 2011 Kayak earned over $160 in advertising revenue for every 1,000 airline ticket, hotel, car rental or cruise queries that occurred on its site. In comparison, we estimate that Kayak earned only about $61 in referral revenue for every 1,000 airline ticket queries on its site, and airline queries account for the bulk of queries – about 754 million of an estimated 899 million total queries in 2011.
The trend has been the same historically, with online advertising revenue per 1,000 online queries (for all divisions) being almost four times the referral revenue earned from airline ticket queries in 2008.
We expect Kayak's online ad revenue per 1,000 queries to go up to $268 by the end of our forecast period.
Higher Referral Revenue For Hotels
Hotel referral fees contribute close to 23% to our price estimate of $31.05. Despite constituting over 80% of total queries on Kayak's website, the referral revenues earned on hotels are much higher than referral revenues earned from air ticket referral.
Although Kayak processed an estimated 754 million airline ticket queries in 2011, the company earned about $81 per 1,000 queries in airline tickets. In comparison, the company processed only about 117 million hotel booking queries, but earned about 2x more or about $267 per 1,000 hotel booking queries.
We expect this ratio to increase in the future as hotel referral revenue increases, while airline ticket referral revenues decrease per 1,000 queries, mainly on account of lower margins in airline bookings.
You can study the impact of a deviation from the above forecasts on our current price estimate, by altering the values in the graphs above.
Disclosure: No positions