Hotel Queries On Kayak Are Expected to Grow Significantly

Kayak (NASDAQ:KYAK) is a travel search company that offers travel suppliers and online travel agencies (OTAs) such as Expedia (NASDAQ:EXPE), Priceline (NASDAQ:PCLN), Orbitz etc., an efficient channel to sell their products and services to potential customers. It provides travel buyers a one-stop research solution to find the best travel deals.

In December 2012, Kayak was acquired by Priceline in a deal that valued the company at $1.8 billion. The transaction is expected to close in the first half of 2013, and Kayak will operate as an independent unit within Priceline. Kayak believes that Priceline’s global reach will accelerate its growth trajectory in international markets and help it further develop as a company.

Kayak’s services are free for travelers. It earns its revenue from advertising placements and via referrals to travel suppliers and OTAs, which in turn depend on the number of travel queries received over its website. Though airline queries account for the majority of travel searches on Kayak, hotel queries are rising at a faster pace and are more profitable ($321 distribution revenue per 1000 queries) compared to airline queries ($79 distribution revenue per 1000 queries).

Hotel referrals contribute over 21% to Kayak’s valuation. We estimate the number of hotel queries will grow at a rapid pace, rising from 167 million in 2012 to close to 600 million over our review period. In this article we explain our rationale behind our forecast.

See Our Complete analysis for Kayak’s stock here

Historically, the number of hotel queries received on Kayak’s website have increased from 24 million in 2007 to 167 million in 2012, a CAGR of 48%. In comparison, the total queries increased at a CAGR of 38% during the same period. We estimate the number of hotel queries received on Kayak to rise at a faster rate (20%) compared to the total queries (17%) in the future as well.

Total Number of Queries on Kayak to Increase at a CAGR of 17%

A query is a user request for travel information for flights, hotels, car rentals and cruises received over Kayak’s websites and mobile applications. Kayak has witnessed a robust growth in the total number of queries processed by it over the years and crossed 1 billion queries in the first 10 months of 2012 itself. ^[1]

Historically, while online travel sales have increased by a CAGR of 10% between 2010-12, the total number of queries on Kayak’s website have witnessed a CAGR of 38% for the same period. ^[2]

While we forecast the number of travel queries on Kayak to continue increasing, we believe that the growth rate will slow down. With over 50% market share of US meta-search category, Kayak continue to be a leader in the market but faces rising competition from other players such as Bing Travel, Farecompare, Google Flight Search etc. ^[3] Online travel sales are expected to grow at a CAGR of 9%, rising from $374 billion in 2012 to $523 billion by 2016. ^[2] We estimate the number of queries on Kayak to witness a CAGR of 17% during the same period.

Source: Trefis

Here are some of the key factors that we believe will fuel number of queries on Kayak’s website in the future-

1. Increasing proportion of mobile queries – Currently, Kayak receives over 15% of its total queries through its mobile platform. In Q3 2012, the company registered an 87% y-o-y increase by processing 56 million queries via its mobile applications. Kayak’s application has been downloaded more than 20 million times over mobile devices so far. The company believes that it has a more loyal mobile user base compared to the PC user base. With a growing adoption of mobile devices around the world, a rising number of users are using these devices to access the web. We expect rising mobile queries to accelerate growth in total queries received by Kayak in the future.

2. Expanding global footprint – Kayak receives about 80% of its revenue from the U.S., and has somewhat struggled to retain its foothold in the international markets. Google’s meta-search initiative is considered to be a growing threat for travel queries received by Kayak as it does not have enough of an international presence to take on Google’s global presence. On the other hand, with the acquisition of Booking.com, Agoda and TravelJigsaw, Priceline has managed to successfully expand its presence in international markets. We feel that leveraging Priceline’s marketing expertise and rapidly expanding global footprint can drive Kayak’s growth in international markets.

3. Threat from Google-ITA – Low dependence on queries from search engines: The acquisition of ITA Software by Google poses threat to Kayak’s role as a travel search product. While the acquisition in general poses a major threat to all travel search companies, the fact that ITA currently contributes approximately 39% to Kayak’s total airfare query results makes the company all the more vulnerable. However, over the last year, kayak has significantly reduced its dependence on ITA for airfare query results, from 60% in November 2011 to approximately 39% at present.

Additionally, the company derives a very low proportion of its queries from search engines. Around 75% of 310 million user queries that Kayak 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, should continue to have a substantial majority of their users visiting their sites directly rather than being routed through a search engine. This will decrease their reliance on referrals from search engines such as Google. (Read: Downside Risks To Priceline’s Kayak Acquisition Due To Google-ITA)

Increase In The Number Of Hotel Related Queries Will Outpace Growth In Total Queries

1. Lack of standardization in hotel bookings necessitates comparison: Air ticket bookings and hotel bookings account for approximately 84% and 14% of travel queries received by Kayak, respectively. Unlike air ticket bookings, travelers usually conduct an extensive search to look for best hotel deals due to wide disparity in average daily rates in hotels.  Thus, hotel queries  have historically grown at a faster pace compared to other travel products. We believe the trend will continue in the future as well.

2. Acquisition by Priceline can help expand footprint in the European hotel market: The hotel market in Europe is much more fragmented with smaller, independent lodgings compared to the U.S., where the market is dominated by large hotel chains. Hotel chains are more likely to offer online bookings through their own websites, while OTAs are more appealing to small, independent hotels outside the U.S. Key European markets represent around 60% of Priceline’s total room nights booked. We believe that Kayak can leverage Priceline’s expanding presence in Europe.

3. Launch of a direct hotel booking path: Kayak has launched its own booking path which enables users to complete their booking transactions without leaving the Kayak platform, differentiating it from other competitors such as Google. Kayak presently has 8 collaborative partners for its direct booking path, contributing 11% to total revenues in Q2 2012. However, as it gets more partners on board, we expect to see a gradual increase in the number of queries received on the platform.

If the number of hotel queries on Kayak crosses 800 million over our review period, there will be a 10% upside in our price estimate. On the contrary, if the number of hotel queries only reach 400 million, our valuation for Kayak will decline by 10%.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. KAYAK Surpasses One Billion Queries in the First 10 Months of 2012, Kayak Blog, November 15, 2012 [↩]
2. Online Travel Sales Explode in Latin America, eMarketer, November 20, 2012 [↩] [↩]
3. Who is so far feeling the heat from Google Flight Search? No major surprises here, Tnooz, February 17, 2012 [↩]