Home Kayak Has Much More Than a Derailed IPO to Worry About

Kayak Has Much More Than a Derailed IPO to Worry About

The decision by online travel service Kayak Software to delay its initial public offering has been blamed on Facebook’s botched public offering a couple weeks ago. But while Facebook’s roughly 25% plunge in share price is a great reason for skepticism in the next Internet company IPO, that’s not Kayak’s only problem.

The online travel market is crowded and Kayak, which launched in 2004, is battling many more competitors than just other old timers, such as Expedia and Orbitz. Newcomers like Hipmunk are giving Kayak and the others headaches by offering visitors a simpler layout that makes it easier to find the cheapest flight and hotel room.

Founded in 2010, Hipmunk surpassed 1 million monthly searches after its first year in operation and was growing roughly 15% each month, according to the San Francisco-based company. The company raised more than $4 million about a year ago in a funding round headed by Ignition Partners.

As a testimony to its better user experience, Hipmunk has made gains in the market despite its similarities to Kayak. Neither company actually sells airline tickets and makes hotel bookings, like Expedia and Priceline.com. Instead, they get a cut when their visitors book travel at the sites of airlines, hotels and other travel services. Kayak also sells ads.

This doesn’t mean Hipmunk hasn’t hit some bumps. The company started out only searching for flights and had to add hotel rooms after it realized airlines weren’t willing to pay much for having traffic directed to their sites. As a result, hotel bookings have become the bigger revenue generator, according to the company.

Besides fighting Hipmunk, Kayak is also feeling the heat from tech giants. In 2010, Google acquired travel software company ITA Software for $700 million in order to start its own flight-search service. Microsoft is also in the game with Bing Travel, which has its own twist. Rather than just selling an airline ticket, Bing can tell the traveler the probability that fares for that trip to Paris will fall over the next week.

To Kayak’s credit, the company has done well over the last year, despite the competition and being a fraction of the size of its largest rivals. The company is profitable. At the end of the first quarter, it reported a profit of $4.15 million, compared to a loss of $6.91 million during the same timeframe a year ago. Revenue rose 39% to $73.3 million. The number of travel searches rose by 45% to 310 million, according to its IPO papers.

And there’s no doubt that Facebook’s IPO cast a shadow over Internet company IPOs in general. The world’s largest social network, with more than 900 million users, went from being the biggest technology IPO on record to the worst-performing public offering in the last decade. The fall from grace has been caused by doubts about its future ad revenue growth and mistrust in the way underwriters handled the share sale. Morgan Stanley led the Facebook IPO and was hired to lead Kayak’s offering.

Kayak’s IPO to raise $50 million was expected as early as last week. The company, which first filed to go public in November 2010, has denied it has delayed its IPO, saying it never set a firm date. A Kayak spokeswoman told The Wall Street Journal that the company is waiting for market conditions to improve.

So its unlikely Kayak will be the first post-Facebook tech offering and therefore a bellwether on investor appetite for Internet company IPOs. That honor may go to ServiceNow, an IT cloud-computing services company, or Palo Alto Networks, an Internet security company, according to financial news service Bloomberg. Both are also to be led by Morgan Stanley.

In the meantime, Kayak will have to continue to fight hard and prove the rivals nipping at its heels won’t derail its growth.

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