Unlike online travel agencies such as Expedia (NASDAQ:EXPE), Orbitz (NASDAQ:OWW) and Priceline (NASDAQ:PCLN), Kayak does not provide online bookings directly but gives consumers a one-stop search solution to the best fares along with other value-added services like flight status updates and pricing alerts. The company aims to offer travel suppliers and online travel agencies (OTAs) an efficient channel to sell their products and services to potential users.
Kayak received close to 900 million search queries on its website in 2011, a 42% increase from 2010, and we expect the upward trajectory to continue for the rest of our forecast period. However, post its acquisition of ITA software in April 2011, Google (NASDAQ:GOOG) has leveraged the same to launch its own online travel search product and hotel and flight search tool. While this in general poses a major threat to all travel search companies, the fact that ITA currently contributes close to 39% to Kayak’s total airfare query results makes it all the more vulnerable to the potential threat. Since airline travel queries account for 85% of total searches performed on Kayak’s websites and mobile applications, the Google-ITA deal could significantly impact the company’s future valuation.
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Kayak Derives 10% of its Queries from Search Engines
Google is one of the leading internet search engines with substantial resources and expertise in developing online commerce and facilitating internet traffic. Post the launch of Google flight searches, competing travel search companies have been accusing it of abusing its dominance as a search engine to control the estimated $284 billion online travel industry. They claim that by having the power to show its own results upfront, Google might have an unfair competitive advantage over other players.
According to Kayak’s latest S1 filing, 75% of the 310 million user queries it received in the first three months of 2012 were generated by direct visits to its websites and only about 10% were generated from general search engines. Companies like Kayak, which have a recognized brand name, might have a substantial majority of their users visiting their sites directly rather than being routed through a search engine. However, Google has the majority market share in internet searches and its foray into the travel space might lead to its dedicated user base switching over from competing sites such as Kayak.
Increasing Contribution From Mobile Queries
At present, queries received via Kayak’s mobile application contribute to around 14% to the total search queries by the company. Additionally, as per the recent S-1 filing, Kayak’s mobile applications have been downloaded 15 million times since 2009 and in Q1 2012 the company registered 3 million downloads. We estimate the mobile share of Kayak’s total queries to go up to 24% by the end of our forecast period.
At the moment, Google’s flight search engine is still at a nascent stage and that’s why many users currently perceive companies such as Kayak to offer a more comprehensive result for a travel query. However, having shed out $700 million for the acquisition of ITA, we expect Google to leverage its superior search technology to add more features and enhance its offering to provide an improved user experience in the future.
Additionally, post the expiry of the Kayak-ITA agreement the comprehensiveness of Kayak’s airline search results might be significantly impacted, though recent trends reveal that Kayak might be collaborating with other software developers to decrease its dependence on Google. (Read: Kayak’s Valuation Significantly Impacted By Googly-ITA Deal)
Our price estimate of $31.05 for Kayak is at a premium of over 10% to the current market price.