Facebook, the giant in social media, is still a midget in mobile. Though the social media giant has asked investors to have confidence that it will come through with a plan to make money from a fast-growing mobile user base – now 540 million users, up from 20 million three years ago – the change in the mix of users has been responsible for a dramatic slowdown in the rate of revenue growth over the past year. COO Sheryl Sandberg told investors last week that the company’s first foray into mobile advertising was bringing in just under $500,000 a day – not enough to prevent investors from hammering the stock. Facebook (FB) shares closed Wednesday at a new low of $20.86 a share, and have fallen 22 percent since reporting second-quarter earnings a week ago.
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Mobile could well turn out to be the David that topples the social media Goliath. But another, albeit much smaller, tech IPO asking for a similar show of faith has gotten a vastly different reception. Shares of Kayak Software (KYAK), a travel comparison service, soared on their first day of trading, July 20. After pricing at $26, the stock opened above $30 and closed that first day north of $33. And Kayak remains in the green, up nearly 27% since its IPO.
Turns out, there’s mobile and then there’s mobile for travel.
Founded in 2004 by veterans of Priceline, Travelocity and Orbitz, Kayak has made big inroads in travel aggregation, searching hundreds of other sites and compiling the results in one place so users don’t have to click through multiple sites to find the deal they want. The field is competitive – and Google owns one of its main information sources for flights – but fans say that Kayak distinguishes itself because it’s easy to use and quick; they rave about its customer service.
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Much like Facebook, Kayak is collecting mobile users at a hefty clip – and much like Facebook, it hasn’t done much to monetize those users yet. Since March 2009, 15 million users have downloaded a mobile Kayak app, which offers competitive prices on airfares, hotels, and cars. Users can create itineraries and share them with friends or monitor flights in real-time. And Kayak just upgraded its iPhone app to let users book directly, without having to switch to another website. Travel queries at Kayak were 304 million in the second quarter, down slightly from 310 million in the first quarter, but up 33 percent from a year earlier. In the second quarter, mobile accounted for 17 percent of travel queries but just 2 percent of revenue, contributing to a slowdown in revenue growth to about 33 percent from 39 percent. Normally, investors hate to see anything remotely resembling a slowdown in sales. But net income, adjusted for taxes, interest payments, and depreciation is still growing nicely, as high as $19.3 million for the quarter ended June 30, up from $11.1 million a year earlier.
Kayak seems to be getting the benefit of the doubt for two important reasons: Travel apps command premium rates compared to other mobile ads and some are betting that Kayak will be “stickier” than competitors. In an email, Seamus McAteer, CEO of Metaresolver, a San Francisco firm that specializes in buying media on mobile platforms, explains that travel ads can command bigger dollars – especially if you can add the coordinates of the users’ whereabouts, says Sacha Xavier Reich, a partner at neo@Oglivy in New York. Hotels, cars, airlines – they are all competing against one another for the same group 365 days a year. They’ll pay extra for an edge in the search. The cost per thousand ad impressions – the most common way advertising rates are set – can double, even triple.
Travel apps are also different from other types of apps, says Mark Holder, the founder if investment firm Stone Fox Capital Advisors in Tulsa, Okla. Consumers appear less likely to review multiple websites when they are on a mobile device than they are on desktop. “Kayak has the ability to become the go-to site on mobile,” says Holder. That’s bad news for competitors like Expedia or Orbitz. TripAdvisor, another competitor, doesn’t appear to have the same stickiness, and its recent earnings disappointed.
Kayak may hold another critical advantage over a platform like Facebook: Users may be more likely to check out the app on an iPad than a smartphone and Holder like other analysts anticipate that tablets, while a small slice of the market, will command a bigger slice of revenues because their ad rates are higher than smartphones.
Also helping Kayak: a slow, subtle shift in the outlook for mobile revenues. “A couple of quarters ago saw a lot more risk from desktop to mobile,” says Lou Kerner, who just launched a new fund to invest in mobile and social media start-ups; he is a big fan of Facebook and believes it has great revenue growth potential. But Facebook is the poster child for desktop-to-mobile risk. But in Japan, a market that has a much more mature market for mobile gaming, advertising rates for handheld devices are higher than for desktops, says Kerner.
Mobile in the U.S. is still far from commanding comparable rates to desktop but Kerner says companies are now beginning to see that they can turn mobile users into customers. And that will lay the foundation for more revenues.
Still, Kayak is far from a sure thing. It’s still a tiny company, yet by one traditional measure, it’s pretty pricey. Business columnist David Milstead of The Globe and Mail, for one, believes Facebook at its current price is a much better bet than Kayak. Facebook, he notes, is trading at 47 times 2013 expected earnings versus 44 times for Kayak.
Kayak sold just 3.5 million shares yet it now boasts a market value of about $1 billion with less than $20 million in net income in the first six months of 2012. On its first day on the market, more than 8 million shares traded hands – not exactly a vote of confidence from the investors who snagged shares in the IPO. That volume has since cooled significantly, and companies with small stock floats can be notoriously volatile. Another danger zone: Insiders will be able to sell substantial number of shares in the next year, which could dent the stock value, at least in the short term.
Nonetheless, Fox Capital’s Holder says the big picture for Kayak is bright because mobile, despite all the uncertainty, is a wave worth riding. Holder says the first numbers he will be checking at earnings time will be revenues and mobile queries. If Kayak can deliver growth, the stock should still have upside. If not, as Facebook execs know, investors can be unforgiving.
