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Introduction

Last night after the close (2/20/2013), HomeAway, Inc. (NASDAQ:AWAY), the number one worldwide leader in online vacation rentals reported sensational growth in all metrics, and the stock reacted in a dramatic fashion with a gap opening of +$3.35 to $28.39 in a market that was in the midst of a nasty sell-off.

In January, when AWAY's stock was around $23.00 per share, I wrote an SA Article about it, suggesting that the economies of scale were kicking in for the company. I hypothesized that its earnings would soon be impacted in a very positive way because of the residual income nature of its model, as well as other factors. I was delighted to see my hypothesis confirmed when AWAY reported the following impressive results:

  • 4th Quarter Revenues increased 22% Year-Over-Year to $72 million
  • 4th Quarter Adjusted EBITDA increased 28%
  • Year-Over-Year Listing Revenues increased 24%
  • 12 Month Revenues topped $282 million,a growth of 22%
  • 12 Month EBITDA grew 20% to $80 Million
  • As a percent of revenue, operating expenses declined 220 basis points year-over-year

AWAY's 2013 Guidance - Embraced By Investors

  • Q1 Revenues in the range of $78 million to $79 million (+21.7% to +23.1% year-over-year)
  • Q1 Adjusted EBITDA in the range of $19 million to $20 million (+ 36% to 43% year-over-year)
  • 12 Months Revenues $339 million to $343 million (+20.9% to 21.5% year-over-year)
  • 12 Month EBITDA in the range of 97.5 million to $105 million (+ 21.3% to 25.1% year-over-year)

Company Overview

Based in Austin, Texas, AWAY was an early entry into the fast-growing consumer market trend of vacationers going online to book vacation rentals from private owners of homes, condos and cabins.

At the same time, property owners (like myself) looking for extra income to cover property taxes and carrying costs of second homes, are signing up at an astonishing rate.... because it all makes sense.

Since the concept really works for all parties (property owners and vacationers alike), some 720,000 property owners in 168 countries have already subscribed to AWAY'S program.

The HomeAway portfolio includes the leading vacation rental websites HomeAway.com, VRBO.com and VacationRentals.com in the United States; HomeAway.co.uk and OwnersDirect.co.uk in the United Kingdom; HomeAway.de in Germany; Abritel.fr and Homelidays.com in France; HomeAway.es and Toprural.es in Spain; AlugueTemporada.com.br in Brazil; and HomeAway.com.au in Australia.

In addition, HomeAway operates BedandBreakfast.com, the most comprehensive global site for finding bed-and-breakfast properties, providing travelers with another source for unique lodging alternatives to chain hotels.

3 Primary Drivers of Growth

#1 - Customer Loyalty: Derived From Positive Results & Consumer Friendly Platforms

Drawing from one's own experience is a great yardstick. I listed my second home property with the AWAY system, and the home consistently runs around a 60% occupancy all year round. I m very happy with the results, especially considering that local hotels near my home operate at about the same level.

AWAY also made it easy for vacation rental owners like myself to set up the online listings. As a non-techie, I was able to set up my listing including photos etc. in an hour or so without aggravation, and without seeking advice from one of my high-tech minded children.

Since I'm 100% satisfied with the results generated by AWAY, and since there's virtually zero marginal efficiency of advertising my home elsewhere, I'll continue to be a loyal and long-term customer.

#2 -Vacationer Benefits

Travelers get to enjoy residential properties (homes, apartments, lofts, cabins & condos) that offer a lot more room to relax and with added privacy, plus the cost is far less than traditional hotel accommodations. So, it's really a no brainer for folks seeking a different and memorable vacation experience. For example, my vacation home is around 1,600 square feet, and with two bedrooms, renters often share the cost with friends or family that come along.

Having experienced AWAY as a property owner, it was simple for AWAY to earn my business as a vacationer, and this point speaks of the brilliance of AWAY's business model. I've traveled the world a good part of my life and I simply no longer enjoy staying in crowded and expensive hotels. I enjoy cooking at home, I enjoy privacy, and saving money, so, now when my wife and I travel, we book a private home or condo using AWAY.

#3 - The Effect Of Residual Income

What has intrigued me about the company is its subscription-based business model and the residual income that it creates. Companies that have to sell something new every day to make money are always faced with a lot of variables and marketing expenses. But, for enterprises like AWAY whereby customers renew the sale for years to come via an e-commerce charge to a credit card, new selling costs are eliminated, income can grow geometrically and profit margins continue to increase.

Because of the residual nature of its subscription business, AWAY generates significant cash flow relative to both revenue and EBITDA . For example, in its earnings release, the company reports a 32% increase in cash flow on a trailing 12 month basis, which added more than $270 million to its balance sheet in the form of cash and short-term investments. AWAY's renewal rates are around 76%, so as its critical mass grows, the profit margins should increase because the acquisition costs have already been paid for.

Here's some quick metrics for AWAY:

YearRevenues
2008$82,000,000
2009$120,000,000
2010$168,000,000
2011$230,000,000
2012$282,000,000
YearEBITDA
2008$24,800,000
2009$30,600,000
2010$43,200,000
2011$66,800,000
2012$80,000,000

Conclusion

Given the jump in the stock price today, I'd wait for a pull-back before buying it, but for all of the reasons stated above, it's my view that AWAY represents a serious growth stock that should provide investors with excellent returns, both in terms of capital appreciation and the prospects of future dividends payments.

Source: HomeAway: The Stock Pops $3.35 (13%) On Record Earnings, 2013 Guidance