Kayak Software - An Analysis Of This Successful Offering

| About: Kayak Software (KYAK)

Kayak Software Corp (KYAK) the company which owns the online Kayak travel website went public on Friday. Its successful debut and that of others over the past week, marked a recovery in the public offering market after the disastrous offering of Facebook (FB) in May.

The Public Offering

Eventually Kayak Software sold 3.5 million shares for $26 a piece on Friday, thereby raising $91 million in gross proceeds. The offering price of $26 came in above the initially guided offering range of $22-$25 per share. The company has very cautiously structured its public offering by offering a mere 9% of its shares outstanding and it has pulled its offering date multiple times already. Kayak already planned to go public in November of 2010.

Careful deal structuring and execution resulted in the much wanted first trading day price gains. Shares opened on Friday at $30.10 per share ending the day at $33.18 per share, marking first day gains of over 27%.

IPO Market In Recovery

After the disastrous offering of Facebook in May the public offering market in the US has seen weeks of a complete standstill as investors confidence in the process and the underwriting banks took a new plunge. In recent weeks some companies have gone public and last week two other moderately sized businesses went public as well. Palo Alto Networks (PANW) and Five Below (FIVE) got their listing. Both companies were valued above $1 billion and saw significant first day price returns.


Kayak generated $245 million sales over its last twelve months. After Friday's jump to over $33 per share the firm is valued at roughly $1.3 billion, or 5.3 times trailing annual revenues. For the full year of 2011 the company reported $225 million in annual revenues which was up 21% compared to 2010. The company reported annual profits of $10 million over that year. For the first quarter of 2012 Kayak reported a 39% growth in quarterly revenues to $73 million on which it reported net income of $4 million.

Kayak, which was only launched in 2005, will continue its battle against much larger competitor Expedia (EXPE). Its major competitor generated $3.5 billion in annual sales in 2011 which was up 13% on the year before. Valued at $6 billion, the market values Expedia at 1.7 times annual sales compared to a 5.3 revenues multiple for Kayak.

Analysts cite that one of the major strengths of Kayak's website is its loyal customer base. Some 75% of all visits come directly towards the website with just 10% being redirected by external search engines. The company received 310 million search queries in the first quarter, up 45% on the year. Kayak reports higher revenues growth compared to its competitor as it grabs a larger market share in the online travel industry. Furthermore the low overhead allows the company to remain profitable at a smaller revenue base and have more operating leverage for future revenue growth.

After the significant first day price returns on Friday, I think the valuation of Kayak has gone too far before I might consider making an investment in the company. Although the growth profile looks good for the coming years the valuation gap with established competitors in the industry ihas grown too large.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.