A Home Away From Home

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

HomeAway (NASDAQ: AWAY) has some first mover advantages in the vacation home rental industry. The largest player in a fragmented industry, it is also reshaping it, making it more structured and organized. Unlike hotel and resort properties, most vacation rentals are smaller -- second homes, shared travel, and mom and pop bed and breakfasts. Very popular in Europe, this segment of travel is catching up in the US and also growing fast. HomeAway has a simple business model, providing low visibility, local property owners with a listing website to grow at an annual listing fee of $360-370.

Positives

This is a simple business model and focuses only on listing of properties, and it shows in their gross profit margin, which is 85% compared to 72% for Priceline (NASDAQ: PCLN) and 78% for Expedia (NASDAQ: EXPE). Wyndham, the largest vacation renter focuses on the professionally managed vacation resort segment.

This niche market is estimated to be 12% of the total lodging market; it addresses a need that cannot be fulfilled by hotels – travelers tend to be a large family or group of friends, with a need to stay together, use the kitchen and enjoy more space.

This is a sticky and loyal demographic and they usually take longer vacations. For them, hotels are not even a second choice, the longer stay making hotels prohibitive.

HomeAway has also managed to increase prices, as listing growth grew 24%, producing 36% revenue growth in 2011.

Weaknesses and Pitfalls

What does it take Priceline or Kayak to muscle into this market? – they have greater visibility and can do it at much lower cost. The threat is real, as Priceline has started adding Bed N Breakfast accommodations and Orbitz launched it own website to cater to this segment.

Wyndham is a big competitor too, with Endless Vacation Rentals and they have more expertise managing properties, though Wyndham has not positioned itself as a vacation rental -- it is positioned as a superior manager, playing closer to its strength. Tripadvisor though, is more of a direct competitor in this market.

At the moment HomeAway is well positioned as the premier listing board – a world wide yellowpages with little else. Transforming from yellow pages to a travel site is going to be a difficult road to travel. In the vacation rental world, a typical transaction is lengthy -- one chooses a property, emails or calls the owner or concierge desk, who then vets the traveler. Payments are direct to the owner and HomeAway doesn’t get involved. For those of us used to Priceline’s or Orbitz’s quick 10 minute experiences this one is likely to cause severe heartburn if things fall through the cracks.

One of the largest types of complaints in this segment is that properties tend not to be as advertised and even if travelers forget the name of the vacation property, they are likely to remember the website they used to book the site.

Valuation

HomeAway is expensive. Even as HomeAway makes 85% of revenue as gross profit, trying to ramp up growth results in a large chunk of it going towards operating expenses. HomeAway’s operating margins were a paltry 11% compared to Expedia and Priceline's 32%. At net, it drops to 2.6%. Top line growth for 2012 and 2013 is slated to be an average of 21%, much lower than the tearing growth of over 60% since 2005. However, in 2013 with $339 Mn in sales, fixed expenses will be spread over a larger base, allowing it to make 66 cents a share, leaving it with a forward PE of 35 in 2013.

It is going to be extremely difficult and expensive to corral this great unmanaged mass of small properties into a fully functional website with payments, reliability of bookings, reviews and consistency in service. Given this uncertainty and the competition getting into this segment, I would wait for a few more quarters to see how HomeAway manages before buying at this price.


poach has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com and TripAdvisor. Motley Fool newsletter services recommend HomeAway, Priceline.com, and TripAdvisor . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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