HomeAway (NASDAQ: AWAY ) is the world's largest marketplace for vacation renting, with a total of 890,000 paid listings under its belt. The company's shares have plunged recently, mainly on investors' valuation concerns. This did not come as a surprise to many, given how expensive the shares were (and still are), even for a growth company. The shares currently trade at 8.6 times the company's 2013 sales, and at a 12-month trailing P/E ratio of 174.
On the surface, it's quite difficult to justify HomeAway's valuation. Not only does the company not generate enough revenue for a company with its market cap, but it also does not pay any dividends.
However, there are some compelling reasons why shares of HomeAway might still be good long-term investments.
Peers in comparison
HomeAway finished fiscal 2013 with revenue of $346.5 million and net income of $17.7 million. Its top-line growth for the year clocked in at 24%. HomeAway's main competitors are Airbnb, which sports 600,000 listings (although the company's website does not say how many of them generate revenue), travel-review company TripAdvisor (NASDAQ: TRIP ) , with 550,000 rental properties across the world, and Priceline Group (NASDAQ: PCLN )
TripAdvisor managed to make $130 million from its 536,000 listings (the company recently added 14,000 listings after it acquired VacationHomeRentals.com this year). The vacation-rentals segment accounted for just 13.8% of the company's 2013 revenue of $944.7 million. This makes it a poor comparison for HomeAway.
Airbnb provides a better comparison. However, Airbnb is a private company and does not publish its financial results. The Wall Street Journal, however, says that the company finished 2013 with revenue of $250 million. Airbnb also recorded revenue growth of more than 100% in fiscal 2013, which implies that it grew about four times as fast as HomeAway did.
Airbnb recently held a round of funding that valued the company at around $10 billion, or 40 times its 2013 sales. That makes the company's valuation expensive relative to HomeAway, even after discounting for its higher growth rate. However, shares of HomeAway have mostly traded at a price-to-sales ratio of around 8 since the company's 2011 IPO. This suggests that the current price is about right.
Different business model
HomeAway's modus operandi is quite different from that of Airbnb. The company charges rental owners an annual subscription fee. According to the company, the average revenue per listing in fiscal 2013 clocked in at $368. Many rental owners typically pay upfront, which helps boost the company's cash flow.
Airbnb does not charge for listings, and only charges when the listed properties are rented out. The company levies 3% of the rental amount on home owners and 6%-12% on renters. Its average revenue per listing of $417 suggests that its model is more lucrative than that of HomeAway.
HomeAway concentrates on established rental markets that provide predictable consumer experiences. Professionals manage these properties and their owners rent them out throughout the year. Airbnb on the other hand is more of a do-it-yourself company where regular people rent out their pads for some cash.
The trend for both companies has of late been leaning more toward convergence whereby HomeAway is moving into Airbnb's lower-end market while Airbnb is increasingly moving upscale. This has led to a considerable degree of overlap between the two companies, and it's common to find many properties listed on both sites. This definitely means that competition in the space is heating up.
Although the renewal rate for property owners on HomeAway was just 72.5% last year, the company still managed to grow its overall volume of paid listings by 25%. This proves that non-hotel accommodations are rapidly becoming popular with consumers. Renting a home for your vacation is not only cheaper than staying in a hotel in most cases, it also comes with unique attractions. Most of these homes are located in quiet neighborhoods away from busy tourist attractions, and they often offer more authentic travel experiences. Big families can cook their own meals in the kitchens and eat together, which is a lot cheaper than dining in hotels.
Other than its attractive business model, there is a lot to like about HomeAway's business. Not only is its revenue growth much higher than the industry average of 1.9%, the company also has no debt to speak of. This is very important for a rapidly growing company since huge debt repayments can end up gobbling up too much of the company's resources and stifling growth. The company's net operating cash flow increased by 6.52% to $26.37 million in the first quarter of the current fiscal year.
Although HomeAway's sales and marketing costs consume about a third of its revenue, the figure has been steadily falling. The company spent $39.1 million on ads last year to generate $346.5 million in sales. That's an efficient conversion ratio, considering that Priceline Group spent $1.8 billion on ads to generate $6.8 billion in revenue. Priceline is typically considered one of the most efficient online companies when it comes to converting ads into sales.
HomeAway is also expanding inorganically. It acquired Stayz, the leading online vacation-rental marketplace in Australia, for $197.3 million in December last year.
That said, HomeAway is likely to face more competitive pressure from Priceline in the coming years since the OTA, or online travel agency, is busy adding non-hotel properties to its website. HomeAway's weak point in this respect seems to be the fact that only 169,000 of its 869,000 listed properties are e-commerce enabled, of which just 12,000 can be directly distributed through OTAs like Priceline and Expedia.
Priceline is a tech powerhouse with great mobile apps, whereas HomeAway's apps have mostly failed to gain traction. Given its huge cash flow and marketing muscle, the giant OTA is perfectly capable of causing all kinds of problems for the likes of HomeAway and Airbnb if it puts its mind to it.
Speculations abound that Priceline might acquire HomeAway, quite likely at a considerable premium to its current valuation. Although Priceline has not yet said a word about it, such a deal is not beyond the company, especially now that it has its eyes firmly fixed on the non-hotel vacation-rentals business. If the companies consummated such a deal, it would deliver considerable shareholder value for HomeAway investors.
The frothy valuation of HomeAway's shares can be justified by the disruptive nature of its business and its potential for high growth. The company will continue to grow admirably on its own, or become an acquisition target of companies like Priceline. Either way, it looks like a good bet for long-term investors. The share price has started creeping upwards, so it would be a good idea to buy now.
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