HomeAway is a growth play in an industry known only for REITs. Should you buy in?
When the travel industry exploded onto the internet over ten years ago, an entirely new way of booking travel pushed travel agents out of the business and handed power to the individual consumer.
Many disruptive models have emerged from this trend, from The Priceline Group’s (NASDAQ:PCLN) “Name Your Own Price” to Hotwire’s opaque model of giving you pricing but not vendor names.
In recent years, a new trend has appeared. People are renting out their private property for use as vacation destinations. It’s a bit like a cross between eBay (NASDAQ:EBAY) and a timeshare. Like eBay, people are taking something they have and monetizing it. In eBay’s case, things are sold. In this business, space is rented. Like eBay, there’s a massive reliance on the goodwill and mutual respect of buyers and sellers.
AirBnB is the most recent incarnation. However, there is a public company that has taken over a lot of market share and it’s called HomeAway (NASDAQ:AWAY).
The rentals are fully furnished, and include homes, condos, villas. and cabins. You can rent by the night, week or month, across 190 countries. The company has 50 websites in 21 languages, and handled 750 million website visits last year alone. You will find what you want, I guarantee it. There’s a million listings, literally.
The company makes 85% of its money by charging listing fees, either by subscription or per-booking basis.
It’s an incredibly robust model. It has won the day because nobody really clued in to this idea before HomeAway and has been able to execute on it, by creating a clearinghouse in a fragmented and inefficient market. The company also made smart acquisitions along the way.
There is competition, as TripAdvisor (NASDAQ:TRIP) has gotten into the game, as has the aforementioned AirBnB, along with Windu.com, HouseTrip.com, timeshares sold by major hotel brands, and even the online classifieds. Still, HomeAway has brand awareness and first-mover advantage.
There’s another potential risk, but only time will tell how it evolves. HomeAway went public in 2011, after the financial crisis. The travel industry was decimated by the crisis. Would HomeAway get destroyed in another serious downturn? It’s possible. However, HomeAway property owners have something that hotels do not – price elasticity. If times are tough, property owners can heavily discount and not lose money since it’s all marginal revenue to them anyway. Hotels cannot heavily discount too much or they’ll lose money.
So do you buy this travel stock? That depends on whether you want to invest in growth or take the more modest gains along with assured dividends in hotel REITs.
Hotel REITs are in great shape. Hotel demand exceeds supply. The travel industry is doing very well. Hotel balance sheets are strong, debt is cheap, and dividends are between 2% and 5%. REITs are arguably a bit overvalued, though.
HomeAway has $393 million in cash and no debt, or about $4 per share in cash. Backing that out of the current stock price, the stock trades at about $30 per share. That’s 37x next year’s earnings, although the travel stock generates terrific cash flow with very little capex, similar to Priceline. Mind you, it’s $80MM in cash flow compared to billions for PCLN.
It’s an expensive stock but a great environment and a great company. It’s also trading 30% off its 52-week high, so pricing is more reasonable than it was. I think the play is either you go with hotels and dividends, or you go with this growth play, which I think has room to go higher. However, set a 7-10% stop loss to protect yourself.
Lawrence Meyers does not own shares of any company mentioned.
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