A Compelling Dot-com Opportunity

Monday, 01 Aug 2011 01:56 PM

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HomeAway.com (AWAY) operates the world’s largest online marketplace for the vacation rental industry. The company’s rental properties are fully furnished, privately owned residential properties, including homes, condominiums, villas, and cabins that can be rented on a nightly, weekly, or monthly basis.

HomeAway’s marketplace brings together millions of travelers seeking vacation rentals online with hundreds of thousands of owners and managers of vacation rental properties located in more than 145 countries around the world. As of March 31, 2011, the company’ global marketplace included more than 560,000 listings of vacation rentals.

Visitors to the company’s web sites can search and compare, at no charge, HomeAway’s extensive inventory of listings to find vacation rentals that meet their specific requirements.

During the year ended Dec. 31, 2010, the company’s web sites attracted more than 220 million visits and averaged more than 9.5 million unique visitors per month.

HomeAway’s ambition is to make every vacation rental in the world available to every traveler in the world through its online marketplace.

Compelling values

Relative to hotels, vacation rental properties provide travelers with compelling values and a wide range of travel lodging options that are more tailored to those travelers’ unique needs.

For example, many travelers prefer vacation rental properties over hotels because those properties offer significantly more space and more privacy than hotels. In addition, many of those properties include multiple bedrooms and bathrooms, functional kitchens, common living areas, and other features and amenities, such as private swimming pools.

 
Most importantly, for someone considering an investment in HomeAway, industry experts expect the market for vacation rental properties to grow at a fast pace during the next few years.

Currently, there are approximately 6 million vacation properties in the United States and Europe that are rented for a fee to travelers for at least two weeks of every year. According to a November 2010 survey conducted by Radius Global Market Research, those vacation rentals generated more than $85 billion of annual rental income during 2010, or nearly $14,000 per property.

Highly-fragmented market

The fact that the vacation rental market is very fragmented bodes well for HomeAway.com. 

Globally, there are millions of individual vacation rental owners and thousands of property management companies seeking to generate vacation rental income. Many of those property owners are individuals or small businesses that lack the resources and brand recognition to market efficiently and effectively to the millions of travelers around the world.

The fact that many travelers aren’t familiar with vacation rentals also bodes well for HomeAway. That’s because once those travelers become aware of the advantages that vacation rental properties offer over hotels, there’s a high probability that an increasing number of those persons will choose to spend their vacations at the properties listed on one of the company’s web sites. 

Meanwhile, online marketplaces such as the one operated by HomeAway have become important intermediaries in the fragmented hotel industry by providing reliable and readily available information, supporting search, comparison, booking, and payment capabilities for travelers, and by providing marketing and distribution services for hotel owners.

Substantial growth potential

While hotel operators currently maintain approximately 215,000 hotels in the United States and Europe, there are more than 6 million vacation rental properties located in those regions of the world. Meanwhile, there are no significant centralized databases of lodging inventory for vacation rentals that can be made available to multiple marketplaces, nor are there any comparably strong chains of branded properties that can command strong traveler loyalty. HomeAway seeks to capitalize on that differential by continuing to expand its listings of vacation rentals.

Financial operating results

HomeAway generates its revenues from property owners who pay the company annual listing fees to provide detailed information about their rentals. Those listing fees are paid in cash and in advance of HomeAway listing those properties on its web sites.

The company’s highly predictable and profitable subscription-based model enabled it to grow its revenues from $8.4 million during 2005 to $167.9 million during 2010, representing a compounded annual growth rate of 82 percent.

During 2010, HomeAway derived 38 percent of its revenue from outside the United States, nearly all of that from Europe. Ninety-one percent of total revenues were generated from the company’s listing fees.

After incurring substantial losses during its early years, HomeAway earned a net profit of $7.7 million during 2009 and then more than doubled those profits to $16.9 million during 2010. However, the company’s common stockholders incurred a net loss during each of the past two years as a result of the payment of $33.5 million and $35.2 million to HomeAway’s preferred shareholders during 2009 and 2010, respectively.

Fortunately, the size of the company’s dividend payments to preferred shareholders will fall sharply this year. That’s because the company used $97.9 million of the funds from its recent IPO to redeem its outstanding shares of Series A and B preferred stock and to pay all accrued but unpaid dividends on its outstanding shares of Series C preferred stock.

Outlook for the stock

Although the factors mentioned above bode well for the longer-term direction of HomeAway’s common stock, my experience suggests that AWAY will trend lower during the next few days. That’s because the company announced on July 27 that its net income declined 85 percent during the quarter ended June 30, 2011 compared to the same period a year ago.

The substantial decline in HomeAway’s second-quarter net income will likely lead many investors to think that they made a bad decision in purchasing AWAY and will therefore likely lead many of those investors to sell.

My experience suggests that investors who bought HomeAway’s stock in the primary market — before it began trading in the secondary market — also will soon sell their holdings of AWAY. That’s because, as of July 29, the value of AWAY had appreciated approximately 48 percent above the price at which those investors paid for it on June 11, 2011 at a price of $27 per share. Any such selling would likely cause AWAY to continue to decline during the days ahead.

Unfortunately, many of the investors mentioned above will likely fail to recognize that HomeAway’s second-quarter net income fell sharply as a result , primarily, of a very wise decision that the company made during that quarter — to substantially expand and improve upon its portfolio of vacation rental listings.

In contrast, astute investors will likely take advantage of the recent downturn in AWAY to buy this stock at some very favorable prices.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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