Surge of Visitors Will Catapult Kayak’s Online Ad Revenues

by Trefis Team
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Almost 54% of our $835 million valuation for Kayak comes from advertising by our analysis. While online travel agencies like Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN) provide online bookings for hotels, airlines, car rentals and vacation packages to consumers, Kayak provides comprehensive research for best fares along with other value-added services like flight status updates and pricing alerts. The company’s online ad revenues have seen a positive growth since past few years except in 2009 where the growth rate declined due to recessionary macroeconomic outlook and tighter advertising budgets.

Kayak sources majority of its airfare query results from data licensed by ITA software, which was recently acquired by Google (NASDAQ:GOOG), and this has put Kayak’s IPO launch in doldrums and is also raising concerns on its future advertising revenues and margins. But, for now, Kayak enjoys tremendous popularity in the U.S. and internationally with its airline and hotel booking queries seeing a consistent uptick.

While we anticipate Kayak’s online ad revenue per 1,000 queries will increase from around $179 in 2011 to $242 by the end of our forecast period, Trefis members expect an increase from $191.80 to $275.50 during the same period. The member estimates imply an upside of nearly 10% to the Trefis price estimate for Kayak’s stock.

Google-ITA Deal: A Concern for Kayak

Google announced an agreement to acquire ITA Software, a provider of online travel faring information, in July 2010 for $700 million. ITA licenses its airfare search and pricing software to Kayak under an agreement which expires in December 2013. The faring software accounts for 42% of Kayak’s overall airfare query results. Airline travel queries account for 85% of total searches  performed on Kayak’s websites and mobile applications. Hence no access to ITA will have a negatively influence on Kayak’s search results, thereby affecting its ad revenues and margins. There’s an additional risk if Google decides to discontinue working with Kayak. (See Kayak Worth $800 Million Though Google-ITA Deal is Concerning)

Rising Number of Visitors and Queries

Kayak’s online ad revenue per 1,000 queries would rise in direct proportion to the rise in the number of visitors to its websites. For 2010, it had hotel booking queries of an estimated 76 million, while the number of airlines ticket queries totaled 539 million. The company has a two-pronged strategy to increase its number of visitors.  First is to have websites with a localized focus for its international markets and second to increase brand awareness by pursuing aggressive marketing. Kayak already operates websites in 14 countries outside the U.S., which includes U.K., Germany, France, Spain, Italy and India. These websites not only offer added convenience of local language but can also better serve regional advertisers.

Our complete analysis for Kayak’s stock is here.

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