The “sharing economy” is the new buzz-phrase in the financial world. It’s an idea that has been around a long time but only caught on when multi-billion dollar venture capital valuations exploded onto the scene.
The core concept is very attractive: take an asset that you already own and monetize it in a manner thus far unutilized.
As this concept develops, the actual earning power for individuals isn’t entirely clear. Many concepts are still shaking out. Nevertheless, some concepts are strong enough that there is profit to be had by investing in certain sharing economy stocks.
The primary obstacle for all of these companies is regulation. As we are discovering with Uber – the mobile app-based rideshare company – a product can just crash into a market and pound away until regulators get their act together, which can often take quite some time. Uber actually faces gigantic challenges, but more on that later.
HomeAway Inc. (NASDAQ: AWAY) is perhaps the best example of the sharing economy. It has multiple portals that act as an online vacation rental property marketplace. It’s targeted more for upscale homeowners and vacationers, allowing them to monetize their real estate.
It’s a great idea, a great platform and a great business. The company’s fiscal year 2014 metrics showed strong growth: 29% revenue increase, 23% adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increase and 26% free cash flow increase. It also had a 17% increase in listings and 20% increase in net income before backing out a new $13 million expense for debt interest.
HomeAway carries $812 million in cash and only $316 million in convertible debt.
Some claim that Airbnb is its competition, but I’m not so sure. The upstart company lists apartments and condos for the average Joe, not the upscale clientele of HomeAway.
HomeAway seems pricey right now at a $2.8 billion valuation on $40 million in operating income. Wait for a pullback before buying.
EBay Inc. (NASDAQ: EBAY) remains the granddaddy of sharing economy stocks. It runs the famous online marketplace for, well, anything. It used to be like a flea market for used goods, but now is a genuine adjunct marketplace for standard retailers.
EBay isn’t the fast-growing company it once was. Much of eBay’s growth is generated by its PayPal subsidiary. But with $9 billion of net cash ($7.50 per share), the stock trades at an effective price of $51.50, or 16.5 times FY15 earnings, on long-term projected earnings growth of 11%.
It’s arguably overvalued, and if PayPal is spun off, I’d go with the spinoff as an investment. Still, eBay generates several billion dollars of free cash flow annually, and that keeps it attractive as a potential Peter Lynch stalwart.
LendingClub Inc. (NYSE: LC) was, in its original form, a true sharing economy product. You lend your own money directly to someone seeking a loan, with the Lending Club website as the go-between. The SEC killed that idea, and it was reformulated so that the company makes the loans, but then sells off participations in the loans to individual investors.
The company doubled originations to over $4 billion in FY14, and doubled operating revenue, but it isn’t making much money. I’d avoid LendingClub for now.
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