Going public hasn't been much of a holiday for HomeAway (Nasdaq: AWAY).
The leading operator of vacation home rental websites went public at $27 this summer. The stock may have traded as high as $45.75 a few weeks after its IPO, but dipping below $20 to hit a new low on Friday has to hurt.
William Blair initiated coverage last week with a ho-hum "market perform" rating.
Analyst Ralph Schackart points out that HomeAway's 625,000 subscribers are more than all of its competitors combined in the $120 billion vacation home rental market. That sounds pretty good until he details the platform's sensitivity to economic changes, fluctuations in rental supply, and the potential for new competition to disrupt HomeAway since this market is still in its infancy.
HomeAway has less than 10% of the estimated global inventory of properties that are offered up to vacationers, so what's to stop a bigwig from crashing the house party? Expedia (Nasdaq: EXPE) and priceline.com (Nasdaq: PCLN) already book a ton of travelers into cramped hotel rooms, so why can't they begin adding actual homes? If it wanted to, couldn't Google (Nasdaq: GOOG) demolish the model by offering property owners free listings and monetizing the travel listings through paid search ads?
Thankfully for HomeAway, slaying the company that has already snapped up VRBO.com and a ton of smaller, niche-specific, travel websites isn't that simple. Does Expedia want to upset hoteliers when a family's offering a three-bedroom home with a pool at the same price as a hotel suite through its site? Is Google ready to handle the fulfillment headaches when bookings go bad, or when its reputation takes a hit as the Craigslist of unfiltered vacation properties?
HomeAway isn't cheap by most measuring sticks. Schackart sees HomeAway earning $0.34 a share in 2011 and $0.45 a share come 2012, but that's on the low end of the analyst average of $0.45 a share this year and $0.55 a share through 2012. At 36 times forward earnings, HomeAway isn't a bargain, but it's a steal if this truly scalable model continues to escalate in popularity. Revenue popped 37% higher in its latest quarter.
The market hasn't had much of an appetite for travel stocks. TripAdvisor (Nasdaq: TRIP) slipped after Expedia completed the spinoff last week. Overseas darlings Ctrip.com (Nasdaq: CTRP) in China and MakeMyTrip (Nasdaq: MMYT) in India are off sharply this year, though priceline.com has come through with another market-thumping performance.
Some of the downtrodden players will bounce back in 2012 along with the general economy, but HomeAway should perform even stronger. This isn't just about travel. HomeAway's growing collection of second homes and available vacation rentals does provide a superior getaway experience for families that can tire of the hotel scene. Haven't your most memorable vacations taken place in an Outer Banks beach home, a two-story villa in the outskirts of Disney World, or your own ski-in, ski-out property on the slopes? HomeAway makes these experiences more accessible, and it will be the preferred way to travel for weeklong getaways in the future.
The economy isn't playing along right now, but that simply presents investors with the opportunity to get in ahead of the tourists.
Arrive early, investors.
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