HomeAway Might Blow Us Away

Jan.20.14 | About: HomeAway, Inc. (AWAY)

HomeAway (NASDAQ:AWAY) is the main competitor to Airbnb, and the only public listing to play the share economy in the residential sector. Its earnings are coming up in a month, 2/20/2013, so now is the time to visit earnings expectations in light of recent pricing strategy changes as they think about how to potentially maximize value. The best short-term entry for investing capital comes usually a month before the frenzy in the options market from earnings. We first take a look at valuation, and a potential short-term trade suggestion to maximize the risk reward.

How large is the addressable market? We estimate that, with $55bn in vacation rental revenue (this is according to PhocusWright - homeowners in the US and Europe received 50B in vacation rental revenue in 2012 - source: here) in which 10-15% is spent in marketing, the core market is about $5.5-8bn in size. Using AWAY's reported revenue of $327mm, we estimate the market penetration to be 4-6%, signaling ample room for multiple expansion-style growth.

With the introduction of pay-per-booking and distribution agreements with third party agents, AWAY should experience meaningful revenue generation from their heavy capital investments into the technology since four quarters ago. There is also embedded leverage in the pricing mechanisms as tiered pricing introduces more volume as the demand curve is dynamically able to adjust to each consumer's utility. Pay-per-booking will lead to an influx of new listings and incremental revenue, which when paired with distribution agreements with online vendors, should be meaningfully positive. Below is a rough estimate for 2014-2015 expectations.

2014

2015

PPB Listings

150,000

300,000

Avg week rented

2

2

Price / week

1,200

1,200

PPB Bookings

270,000,000

720,000,000

Margin

10.00%

10.00%

PPB Revenue

27,000,000

72,000,000

Click to enlarge

Assuming that revenue grows by incremental amounts above as well as from their organic growth in existing business, I calculate $42 for fair price at 60x P/E multiple. I think the assumptions are conservative as pay-per-booking listings should increase more than the equivalent of 30% of Airbnb's business given their international reach and loyal client base. I also think renting out your home for only 2 weeks a year is very conservative. Ultimately, this is a hard revenue line item to predict but I think $25mm-30mm incremental revenue is fair with room for a tremendous upside.

As the company makes a successful transition to being qualified into the vertical search category of its industry with its new pricing strategy and distribution agreements, the bull case implies revenue growth of 25% for over 5 years and EBITDA margins to expand to 35% in 2016. I believe AWAY can become a strong vertical search competitor, benefiting from strong network effects in a market place with fragmented supply / demand bases, and operate meaningful tiered pricing to capture economics for every utility profile. The real risk is that pay-per-booking model may cannibalize already existing listings. The company also needs to work on raising the retention rate. At 75%, it is far below Airbnb's, and this number will be important to watch for sustained net growth.

Historical price change on Earnings day

Date

Season

% Price Change

11/6/2013

Q3 13

15.85%

7/25/2013

Q2 13

-5.09%

4/23/2013

Q1 13

-5.29%

2/20/2013

Q4 12

13.34%

11/1/2012

Q3 12

-11.31%

7/25/2012

Q2 12

4.04%

4/24/2012

Q1 12

0.08%

2/22/2012

Q4 11

-7.83%

10/27/2011

Q3 11

-9.67%

Click to enlarge

The above graph should show you that AWAY moves significantly on earnings day. What is the right volatility to pay for this, and what is the best risk reward? You can definitely choose to just own the stocks, but I also took a quick look at the options market, and the best contract to play is for 2/22/2014 expiry. At the money options are trading at 44.5% volatility today, which only implies a 2.8% daily move. This is a deep discount, despite the cosmetic premium (since 1 year implied volatility is trading at 40%). In addition, historical volatility realized in the last 50 days are 47%, and the last 100 days are 40%. This shows you that while 45% seems high, in the context of owning 1 month volatility with earnings embedded that implies 15% moves, the volatility, in effect, should be closer to 240%.

The best value I see is to buy the 45 strike / sell the 50 strike call options for Feb 22 2014 expiry.

Bid

Offer

Mid

45 strike

1.05

1.2

1.125

50 strike

0.3

0.45

0.375

Call spread

0.75

Click to enlarge

This costs you 75 cents today, and the maximum payout is 5 dollars, which implies a 6.67x risk reward ratio. This is one the best risk reward ratios you can own in call spread strategies, especially with an earnings catalyst embedded. If you further assume that the stock will move up by 15% on the upside, that implies the call spread will be worth about $2.6, which is 3.5x the capital invested. Of course there is always the possibility that the stock goes down, but the optionality in this exercise remains good value. If you are bullish on the stock, the options strategy is one of the best ways to play into earnings expectations.

Risk reward

6.67x

15% move from spot

47.5985

CS Value at expiry at implied spot

2.5985

MOC (multiple on capital invested)

3.5x

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.