Assessing the Bear Cases Against HomeAway

| About: HomeAway, Inc. (AWAY)

Last week I wrote about the potential disruptive effect of HomeAway (NASDAQ:AWAY) on the hotel industry. This week I would like to present investors with a follow-up on the bear cases against AWAY.

Two common bear argument against the company are valuation and competition.

The valuation argument against AWAY is difficult to formulate due to the fact that AWAY operates in a niche industry that is catered to an emerging class of consumers. Because of the potential disruptive effect the company has, it is difficult to gauge the size of the vacation rental market and its growth potential. This degree of uncertainty makes forecasting future free-cash-flow to be quite difficult. In addition, it is almost impossible to conduct a comparable analysis on the company because public-listed pure plays are not available. One can argue that Expedia (NASDAQ:EXPE) and Wyndham (NYSE:WYN), or even eBay (NASDAQ:EBAY), Google (NASDAQ:GOOG), (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO), are public-listed comparable, but I would like to remind investors that these companies are not pure comparables because a majority of their revenue are not generated from vacation rental. To accurately analyze how these “competitors” fare in the vacation rental industry, one must breakdown these companies’ revenue source and cost structure from just the vacation rental unit, which is almost impossible base on the available public information. Therefore, conducting an apples-to-apples comparison also prove to be difficult.

A more viable argument against AWAY is the competition argument in that AWAY is in a fragmented market with low barrier to entry and faces a large number of competitors ranging from brand-name hotel groups and travel companies to local individual property owners. Initially, the number of competitors that AWAY faces could sound daunting. But after a careful analysis, one can see that AWAY has greater value proposition than the ones provided by its “competitors.”

AWAY’s core value proposition is to provide travelers with an alternative lodging option that features a “home feel” without the services and amenities provided by traditional hotels and a lower price. But its secondary value proposition is to provide travelers with a site containing the most comprehensive and relevant vacation rental listings on the web.

Many competitors in the vacation rental industry can provide the same core value proposition that AWAY has. In order to differentiate itself from the rest, AWAY took a savvy strategic approach of acquiring smaller players to compile the most number of relevant listings compare to the other companies. (See table below)

Listings (‘000)







70 (estimate.)







Inter Chalet



James Villa




2 (estimate.)

Note: All data compiled from company websites, with exception of estimates

By comparing with its “competitors” and pure play rivals, AWAY offers over 560,000 listings compare to the runner-up, Expedia, which through its TripAdvisor and FlipKey, offers less than 20% of AWAY's offering. In addition, AWAY covers more countries than the other vacation rental sites. This could be a result of AWAY’s previous strategic acquisitions that are clearly helping it to emerge as a leader in the vacation rental industry.

One thing about disruptive innovation is that once it gains traction and critical mass, it is likely to get bigger and create an obstacle for the entrenched traditional players to catch up. Look back at (NASDAQ:AMZN) when it first started selling books online while Barnes & Noble (NYSE:BKS) still focused on its bookstore expansion plans. Years later, Amazon made Barnes & Noble irrelevant in the online book industry, even though Barnes & Noble also offers online shopping. Similarly with ZipCar (ZIP), the company slowly built its critical mass in the hourly-rental niche market over the past 10 years and now commands 75% market share in the industry.

AWAY could be on the same path as a disruptive innovation just as how Amazon and ZipCar once did. The key is the execution of continuing to provide the most comprehensive listings in the most number of destinations around the world so that AWAY can effectively build an obstacle for the runner-ups and a barrier-to-entry for potential competitors, which eventually translate to greater brand recognition and loyalty among travelers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.