Throw This Stock Away

Editor's Note: A previous version of this article erroneously reported analyst estimates and excluded Kayak's partnership with Bing Travel.

The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Kayak Software (Nasdaq: KYAK  ) .

One-way trip to nowhere
Talk about a rough first leg of a journey.

Kayak shares opened lower today despite posting what seems to be strong financial results in its first quarterly report as a public company. 

Revenue climbed 36% to $76.9 million, just ahead of the $75.2 million that Wall Street was targeting. Profitability nearly doubled to $7.3 million -- or $0.19 a share -- which was just ahead of where the pros were perched. 

It's easy to like Kayak. The company runs a fast-growing platform that scours other travel websites and service providers to dish out the best hotel rates and airfares. There were 304 million queries entered into its aggregator search engine last quarter, up 33% from last year's second quarter.

It's not perfect. Mobile search is naturally growing a lot faster than the 24% uptick in desktop queries, yet the monetization rate for smartphone searches is less than a sixth of what the company is averaging through its slower-growing website. That is something that will bear watching in the coming quarters.

Kayak seemed pretty overvalued at 39 times this year's earnings and 29 times next year's projected profitability, especially when you eye the competition. 

Then we get to the business model itself. Yes, what Kayak does is neat, but it's not the only aggregator out there. Kayak has snapped up some of its rivals, but it was Microsoft (Nasdaq: MSFT  ) that scooped up Farecast.com before relaunching it as Bing Travel. Thankfully Kayak struck a partnership with Bing Travel last year.

Growth is starting to decelerate. The 304 million queries during the second quarter are actually a sequential dip from the more than 310 million queries that Kayak serviced during the first three months of this year.

Kayak is a neat website to score a deal, but the stock itself is no bargain.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

• Google (Nasdaq: GOOG  ) : Nearly a third of all travel research originates on Google, according to Experian Hitwise. The beauty of being the lead provider in 30% of the Web's travel requests is that it can eventually cash in on that traffic itself. Google's already doing that with the purchase of ITA Software, improving its fare searches, and making a bigger play in local marketing. Perhaps more importantly, Google is trading at just 16 times this year's earnings and less than 14 times next year's target even though it's expected to grow its revenue at a headier clip than Kayak.
• priceline.com (Nasdaq: PCLN  ) : The "name your own price" travel portal has been the industry darling, beating Wall Street's bottom-line estimates for 25 quarters in a row. The market has soured on Web-based travel websites, but all that's done is make Priceline an even better deal. The stock can now be had at a forward earnings multiple in the teens. You don't get that kind of opportunity too often.
• Travelzoo (Nasdaq: TZOO  ) : Kayak may be seen as a disruptor to many travel websites, but Travelzoo is pretty much Kayak-proof. The company puts out the Travelzoo Top 20 email that features sponsored travel deals. In other words, we're talking about deeper getaway bargains than what Kayak can crank out. Europe has been a challenge to many of the larger travel-booking websites, but Europe's actually growing faster than Travelzoo's domestic business these days.

Please take our Motley Poll, then use the comments box below to elaborate on your choice.