How High Will the Orbitz IPO Fly?

A share sale by the online travel site may not be the dog some are predicting, but there's still reason for investor caution

by Olga Kharif and Aaron Pressman

It wasn't long after travel site Orbitz announced plans on May 10 to go public that blogs, papers, and pundits predicted the initial public offering would be a dog. Tech blog GigaOm.com said the offering will be "the worst IPO of 2007."

The bears have a case: Six-year-old Orbitz, purchased for $4.3 billion by Technology Crossover Ventures and affiliates of private equity firm the Blackstone Group in August, is still losing money, and the IPO documents filed with regulators don't offer a clear path to profitability.

Such early prognostications drowned out what some investors consider sound reasons for optimism on Orbitz: the company's ability to generate cash, newfound favor for online travel stocks, the expected timing of the IPO, and healthy traffic on the Orbitz sites. "Travel's been doing very well lately," says Eric Gebaide, managing director at investment bank Innovation Advisors, which deals with Internet companies and private equity firms.

Travel Stocks Ascending

Ryan Jacob, portfolio manager for Jacob Internet Fund, is encouraged by Orbitz' cash-generating potential. Orbitz generated $165 million in net cash from operations last year, up from $59 million in 2005. The company's paper losses are due mainly to acquisition-related accounting writeoffs. The $750 million offering is being underwritten by securities firms that include Morgan Stanley (MS), Goldman Sachs (GS), and Lehman Brothers (LEH).

What's more, online travel stocks are on the rebound. Shares of market leader Expedia (EXPE) are up 17.6%, to $24.76, since the beginning of the year, though that's due partly to an aggressive share buyback program. Priceline's (PCLN) stock is up 29%, to $56.75 a share. Today, Priceline is trading at twice its sales and Expedia is at three times sales. Orbitz, which plans to make less than half of its shares available, should land in that ballpark, with a valuation closer to Priceline's than Expedia's, analysts say.

Timing could also work in Orbitz's favor. Presentation documents imply Orbitz will sell shares in October, just as online sites are basking in the glow of the summer and back-to-school bookings boom.

Red Flags

None of this is to say Orbitz is in the clear. True, its sites, which include Orbitz.com and CheapTickets.com, command three times Priceline's traffic, according to consultancy Hitwise. But it lags behind rivals in sales. Expedia controls 14.5% of total online travel traffic, while Orbitz.com and CheapTickets.com hold 22%, according to Hitwise.

Orbitz had $146 million in losses last year, in part because it's not selling as many higher-margin hotel stay and vacation packages. Orbitz has been boosting sales of these products, but its prospectus fails to describe in detail how it will expand these sales in the future. Today, the bulk of Orbitz's $752 million in annual sales comes from airline ticket sales.

Another red flag: The prospectus alludes to a senior credit facility that would be set up at the time of the IPO and used in part to remit Travelport, Orbitz's parent company. The prospectus is mum on the debt amount, but a large remittance to Travelport will effectively increase Orbitz's debt, already at $407 million.