AWAY: Changing Revenue Model Amid Increasing Competition, Time To Sell Or Short The Stock?

| About: HomeAway, Inc. (AWAY)
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HomeAway Inc. (NASDAQ:AWAY) is transitioning to Pay Per Booking model from predominantly subscription based revenue model, which is more productive for customers but less predictable for the company. Business model moves combined with declining growth rates for subscription renewals & paid listings, upcoming seasonally weakest quarter and increased competition from high profile startups would be ominous for lofty valuations currently enjoyed by the stock.

Besides the individual issues, even traffic to the site is growing (19% in Q2) at less than the growth of global Internet traffic itself, the stock is trading at valuations that deny any of these concerns at 50 times this year's earnings or 40x EV/EBITDA. With revenue model changes to start affecting revenue and earnings in coming quarters, the stock can go to low $20 range, which makes the case for selling or shorting the stock at current levels.

Industry Footprints

HomeAway Inc. is $2.6 Billion market cap, a Nasdaq listed company operating online vacation home rental websites for property owners and managers. These property owners or managers pay the company yearly listing fee (currently at $386 per listing), which makes up almost 80% of the revenue. The company also sells complementary products including travel guarantees, insurance products and property management software and services. The company has 44 different websites offering these services.

Short-term home/room rental market, where the house owner rents out a part or full house for a few days, is experiencing massive growth and is taking market share from Hotels and Resorts. Consumers can benefit from savings and house owners can increase utilization of their vacant property. This trend is often referred as 'Collaborative Consumption'. Startups like AirBnB, 9flats and some established players like HomeAway or Tripadvisor (NASDAQ:TRIP) dominate this market.

Startups have followed the Pay Per Booking (PPB) model and focused on city/ non-vacation destination market but are now moving into the vacation home rental market as well and forcing PPB fee structure on the entire market including HomeAway.

Figure 1 AirBnB booking numbers. Source: AirBnB

Trouble spots for HomeAway

With the Hotel industry and short-term rental industry going through a shake up due to this PPB based startups, HomeAway's stock looks even more vulnerable due to various company specific concerns. Some are following:

Changing revenue model to hurt

Starting this quarter, HomeAway is expected to start ramping up its Pay Per Booking model. This is after similar efforts by Flipkey and Tripadvisor, who have pretty much given up on a subscription based revenue model and focusing on PPB model. As discussed earlier, this move is more of a market dictated move as customer adoption is very skewed towards PPB model.

Why is PPB bad for a subscription-based company? One of the biggest reasons is that it effectively caps the upside price per customer since if they are house owners who pay more in commissions (under the PPB model), they will move to the subscription model. During the quarter, out of 21% annual revenue increase, 15% was from Average Revenue Per Listing (ARPL) increase.

Since HomeAway will offer both revenue models (subscription and PPB) and have a predominantly subscription based customer base, there will be a strong bias towards subscription-based customers affecting their ability to compete in this market. This bias will be accentuated by the cannibalization effect on its revenue by the PPB model.

HomeAway seems less than ideally placed for success in PPB based market for the following reasons.

  1. AirBnB being leader already has the largest database of customers and listed properties. Owners will have a tough time managing listings on multiple sites with different calendars so will opt for a site that has the most listings and booking traffic. Booking traffic will drive listings and in turn conversion ratios.
  2. As an estimate, subscription based offerings provides better value to listings of more than 20 weeks a year and PPB costs less otherwise. Since property managers and full time renters dominate subscription based offering, their low usage customers would move to PPB model. Usually PPB customers include event-based & short-season listings, which tend to be of shorter duration.
  3. Right now, the company has to worry about selling subscriptions only but after PPB move it will have to manage commission rate, number of weeks available for PPB listing and bookings to those listings.

The first phase of HomeAway's PPB offering will be available in beta version by the end of the third quarter.

Rise of collaborative consumption; HomeAway late to the party

While market grew faster for PPB sites for short-term home rentals, HomeAway missed the bus by focusing on the subscription model and vacation homes. So much so that while the listings for HomeAway grew at 20% (OTCPK:CAGR) from 2008 through 2012, AirBnb bookings at the same time grew at more than 100% annually.

Some leading indicators like search trends are concluding the same.

AirBnb and HomeAway comparative search trends. AirBnb in Blue and HomeAway in Red

As shown by the chart above, AirBnb is clearly taking mind share compared to HomeAway, especially since early last year. This is happening when unique visitors to HomeAway's site are still more than 3 times that of AirBnb (according to Compete rankings).

The biggest challenge for HomeAway is that these sites started by giving individuals the ability to list rooms and city apartments are now expanding to list vacation home rentals as well.

Business fundamentals slowing down

These defining changes are happening when the fundamentals of the business are slowing down, which partly explains the need to move to newer revenue models.

Paid listings for HomeAway in the current quarter were 5%. Even without the recently offered ability for customers to combine their listings, it would have been 10%. As shown by chart on the right, this growth is much below the last five-year average.

Renewal rates also declined from 75% in Q2 2012 to 72% in the current quarter.

Looking at some important data points below, trends seem less than favorable.

HomeAway Inc.

2011

2012

Q2 2012

Q2 2013

Organic Rev. growth

30%

20%

22%

21%

Renewal Rate

77%

74%

75%

72%

Traffic growth

25%

21%

n/a

19%

Listing growth

22%

11%

17%

5%

Global weakness to extend problems: With 40% of revenue from outside US, both weak global economy and a stronger US Dollar will have a negative bearing on the results.

Some other issues worth noting

Government regulation is coming in between, what can be a better growth environment for the sector. Cities usually don't allow renting homes for less than 30 days but currently violations are being cited on reported complaint basis. Going forward, it's still uncertain how regulations will move.

The company has made almost 19 acquisitions over the last few years, yet traffic growth of 19% Y/Y is less than the global Internet traffic growth.

Looking at the operational productivity, headcount grew by 26% compared to the revenue growth of 21% and listing growth of 5%. Not the most productive use of resources.

Headcount growth

Listing growth

Revenue growth

Renewal rate growth YY

Q2 2013

26%

5%

21%

-3%

Valuation:

Stock

$31

P/ Expected 2013 Earnings

50

Cash/ Share

$3.8

P/ Expected 2014 Earnings

41

P/ Book

4.6

EV/ EBITDA

41

P/ Sales

8.3

Operating Margins

10%

EBITDA Margins

29%

Looking at the figures above, it's clear that valuation is very rich but cash margins are very strong but as company moves away from year-long subscription based revenues, it is bound to affect the cash generating ability of the business too.

Conclusion

Business momentum, including the promise technology holds, is usually one of the best leading indicators for technology stocks and looking at the rate of growth or competitive positioning, trend doesn't look like a friend of this stock. Target is $20.

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.