Description

Short AWAY Recommendation

AWAY is a richly valued internet name that is being priced like the market leader with a large total addressable market when in reality, I believe it has moved from the historical market leader to a current distant second. The effects of this competition have been subtle, and as a result the market is mispricing its longer term implications on the business. Additionally, clear signs of pressure have emerged that challenge the company’s historical 20% organic revenue growth pattern and its ability to meet consensus projections.

Company Description

AWAY operates one of the world’s largest online listing services for vacation rentals with around 1mm of listings across its network. The majority of revenues come from property owners and managers that pay from $349 to $999 a year to list their properties on the company’s sites. The company also recently introduced a free to list product that charges the property manager 10% per booking instead of the subscription fee.

The majority of revenues come from the Homeaway.com and VRBO.com brands, and a smaller portion of the business consists of other brands such as Vacationrentals.com, Toprural.com, Stayz.au, and Travelmob.com. This portfolio of brands has been put together over time though acquisition activity.

The Ascension of Competitor Airbnb

I believe the rapid rise of Airbnb has made them the leader in the war for consumer mindshare in the vacation rentals category. Airbnb currently has 800k listings worldwide, a number that has maintained triple digit growth rates for the past three years. While Airbnb is private, many other available performance measures such as website visits and brand awareness show similarly rapid growth and have surpassed or will soon surpass the combined properties of the AWAY network. Airbnb was recently valued at $13 billion.

While management suggests Airbnb represents a different vacation rental product, and that there is little listings overlap between the sites, this is both true and misleading. Airbnb originally grew with a focus on single room rentals, but today most of their listings consist of entire property rentals. Searches for properties on Airbnb versus the AWAY network reveal very similar property offerings. While historically there has been little listings overlap between the two, my sense is that this is increasing rapidly.

To date, Airbnb has been successful at expanding the vacation rental market, and thus their growth has largely not come at the expense of competitors. Compared to AWAY, Airbnb’s customer demographic skews younger, and represents many who are new to the vacation rental concept. On the other hand, the user base for AWAY consists of many veteran property managers who have defaulted to listing on the AWAY network because of its historical market leading position. My checks indicate that many of these suppliers on AWAY have been historically skeptical about the rapid rise of Airbnb, with some still thinking of the Airbnb traveler as a couch surfer. However, with Airbnb’s rapid growth, many are realizing that this is not the case, and are increasingly listing on Airbnb and pleased with the lead generation that has resulted. The barrier to trialing a listing on Airbnb is essentially zero, as it is free to list and process takes minutes. Airbnb does charge a 3% fee of completed bookings to suppliers, although this is similar to the 2.5% processing fee AWAY charges for online payments.

When accessing management’s contention that there is little overlap between listings on Airbnb and AWAY, It is important to distinguish that while the suppliers on Airbnb may currently come from a different demographic, both companies compete for the same vacation rental shopper. My research suggests that Airbnb has already won the consumer mindshare game and has become largely synonymous with the Internet based vacation rentals category. At Airbnb’s current level of scale, an increasing percentage of their incremental growth will come at the expense of competitors. This bodes extremely poorly for AWAY in what will likely develop to be a winner takes all category where the winner will be the company that controls the vacation rental shopper.

Dissecting Airbnb’s Superior User Experience

I believe the main reason for Airbnb’s rapid growth is that it has created a far superior service from a consumer experience standpoint compared to existing business models, including that of the AWAY network. One primary reason for this is Airbnb’s deep internet integration with respect to its property inventory. Airbnb requires consumers to contact and request bookings via an internal Airbnb system. For its property owners, Airbnb’s system requires owners to maintain and update the property’s calendar of availability along with seasonal pricing information. This is in contrast with the AWAY portfolio which functions largely as listing service. On AWAY’s network, the property’s online calendar of availability may or may not be updated, and most consumers are required to contact the owner via email or phone to confirm pricing, availability, and to complete the booking.

One key benefit of Airbnb’s internet integrated system, which the industry is increasingly moving towards, is that it returns superior search results to the vacation rental shopper. Airbnb’s unique search algorithm places more relevant, higher quality listings higher in the search results by factoring in variables such as relevance, listing popularity, and owner responsiveness to online inquiries. The end result is a superior consumer experience. Searching, filtering, and finding high quality listings is a quick and painless process. Contacting the owner with questions typically yields a response within hours and booking and paying for a property takes minutes. This contrasts with the experience on the AWAY network, where:

• Listing availability is uncertain. A listing shown in search results as available may not actually be available if the user has not updated his online calendar.

• Prices displayed in the search results sometimes do not reflect the true cost of the trip because price varies depending on the length of stay and seasonal trends, which is information that may be disclosed in the listing description but not in any internal Homeaway system.

• Property owners may not respond to inquiries in a timely manner. Contacting owners requires communication via email or phone, and the owners are often slow to respond. The owner may not respond at all if they are fully booked and feels little incentive to respond to additional inquiries. This is unlike Airbnb, which rewards property managers that are more responsive with better placement in search results. AWAY’s bookings primarily occur via channels outside of its control and ability to measure.

• AWAY search results for property listings are sorted primarily based on property manager subscription fees. The basic subscription listing tier costs $349/year, compared to $999 for the platinum tier. The more expensive tiers allow the supplier’s listing to be displayed favorably in search results, leading to more bookings. This type of model sacrifices the vacation rental shopper’s user experience in favor of greater listing monetization.

Homeaway’s management team appears to acknowledge the superiority of Airbnb’s e-commerce enabled model, and has been encouraging and incentivizing its property owner user base to adopt many of the elements of the model that Airbnb has been utilizing for years. Notably, AWAY’s percentage of listings that have a “book it” online button, has increased to 32.6%, from 5.4% a year ago. Management recently announced their intention to more aggressively push their user base to bring this number up to 100% in two years, which highlights the urgency of the situation. I note that this transition is an important first step in attempting to catch up to Airbnb’s customer experience model, but carries significant risks, as many of the property owners on AWAY’s network will resist change for the following reasons:

• Property managers already have their own offline calendar, records, and preferred renter communication methods, and do not like being forced to use AWAY’s systems.

• Property managers would have to pay additional payment processing fees using many of AWAY’s online payment methods.

• Property managers that are paying extra to have their listings displayed favorably in search results do not like the idea that AWAY is now factoring in additional variables like owner responsiveness to determine the search sorting. To encourage property managers to adopt online booking capabilities, AWAY is placing listings that are e-commerce enabled more favorably in search results. Many property managers that are paying more to have their listings appear earlier in search results now feel cheated upon discovering their search positioning has deteriorated after AWAY has implemented these initiatives.

• Certain property managers may be under reporting rental income for tax purposes and would no longer be able to do so for bookings transacted through AWAY’s online system, as this income is reported to the IRS.

Furthermore, various superior design elements contribute to a far better user experience at Airbnb vs. the AWAY network:

• Airbnb has a developed “social” element with user profiles and a review system for both hosts and guests. This is essential in building trust for both parties in a category where there is generally a degree of skepticism between both guests and hosts.

• More user friendly map based search functionality and sorting tools.

• Sleeker website design across desktop and mobile.

• Professional photos for listings that Airbnb typically pays for.

• Airbnb utilizes no display advertising, unlike the AWAY network.

Finally, Airbnb benefits from a single global brand. The AWAY network is comprised of two medium sized brands and many other smaller, regional brands.

One major advantage for AWAY is that Airbnb is free to list for suppliers but passes the cost of the booking on to the consumer via a 6 to 12% reservation fee, while AWAY is free to the consumer. Even with the additional fee, I have generally found Airbnb properties to be priced comparably or slightly cheaper than similar properties on the AWAY network. This may be due to the fact that the suppliers on Airbnb are new to the business and have priced their properties somewhat below the existing market.

Other Competitors

Besides Airbnb, the vacation rental industry has generally become more competitive. The other major players of note are Tripadvisor and Priceline’s Villas.com. I consider these players to be moderate threats, as they do not have the consumer brand awareness equal to the level of Homeaway.com, or VRBO.com. Naturally if TRIP or PCLN decided to use their deep pockets or existing hotel related infrastructure to more aggressive promote their vacation rental offering, AWAY would be at a disadvantage. One key point of note is that TRIP has shifted their vacation rental product form a subscription fee product to a free to list product over time, contributing to their ability to rapidly grow their listing count. This contributes to an increased level of industry promotionality that negatively impacts AWAY’s ability to add paid listings and raise prices, although it is still unclear if suppliers are generating enough listings through Tripadvisor for it to threaten AWAY’s existing book of business.

I will also note that a key tenant of the bull case on AWAY is that the company is a high quality name that benefits from traditional network effects: suppliers list where the customers are and consumers go to where the listings are. The reality is that the supply side of the network is very easy to replicate if you make the property free to list, as it takes less than half an hour to list a property online and there is little disincentive for suppliers to list on multiple sites.

Listings are a commodity. It’s the consumer audience that matters.

The history of the internet is littered with first movers that initially dominated a category but was rapidly displaced by better positions competitors. In my experience I cannot think of an example in recent US Internet history where a company is so far behind a competitor from a user experience standpoint (an admittedly qualitative assessment but one that is backed up by Airbnb’s extraordinary growth rates) but still being valued as if it were the market leader. I believe this market mispricing is understandable, and likely due to the following:

• Airbnb is not public and their rise is not as visible to the market.

• The street believes that Airbnb and AWAY are targeting different customers and have limited listings overlap.

• The impact of competition has not been very visible in AWAY’s reported financials.

As I’ve noted earlier, while historically the two companies have attracted different kinds of suppliers, there has been increasing competitive overlap. Additionally, focusing on the different profile of suppliers misses the more important point that to the vacation rental shopper, both companies are offering the same service.

If property managers are generating enough reservations through AWAY to justify the subscription fee, there is little reason to cancel their subscription unless bookings per paid listing starts to deteriorate. Also, subscription contracts are annual which makes the business even stickier. However, it is clear that the vacation shopper drives bookings which in turn dictate where property managers spend their advertising dollars. As a result, the ultimate winner will be the one that controls the consumer audience, as advertisers follow audience.

Given challenges, historical growth rates look unsustainable

Given AWAY’s recurring revenue model based on annual subscriptions, and the fact that Airbnb’s historical listings growth has expanded the market, I do not expect an implosion in AWAY’s financial results but rather a modest but persistent deterioration in growth rates and financial metrics. We note that recent reports have been consistent with this idea:

• Organic website visits have declined from around 20% growth last year to low teens this year. I would note that this rate of growth is particularly disappointing given website visits tend to be inflated by the double counting of mobile and desktop visitors as consumers increasingly access the internet through multiple screens.

• Organic revenue growth looks to decelerate in Q4 2014 to 18% from 23.9% in Q3 2014, the biggest rate of deceleration in the company’s publicly available financials. While management blames this issue on macro and competitive issues in Europe, this explanation is not entirely satisfactory given Europe represents only 34% of revenues, and a business consisting of annual subscription revenue should not exhibit such a rapid rate of change.

• Renewal rates have begun tick noticeably down in the last two quarters, which management maintains is an issue isolated to Europe.

• While organic revenue growth in FY2014 looks to be steady at around 22%, vs the 22% in FY2013, growth this year has benefited from the implementation of free to list, pay per booking listings at the end of last year. I estimate this has contributed between 3 to 5% to organic revenue growth this year, and is mostly a one and done type of revenue growth driver. I believe there was significant pent up demand for pay per book listings and that this revenue growth driver will largely diminish as its launch is anniversaried next year.

• Sales and marketing expense ratio has significantly deleveraged this year by around 200bps, including 438bps in Q3 2014. A significant amount of traffic to AWAY is generated through both paid sources and organic search. It appears competitor marketing activities have increased over the past year with Priceline’s entry into the market, Tripadvisor continued expansion, and Airbnb’s first TV campaign late last year. It is likely that this translates into increased competitive bidding for paid keywords on Google as well.

• The AWAY network benefits from very favorable organic Google search positioning, which I attribute to their fact that they have historically had the most listings in many markets. With Airbnb’s rapid growth in listing count which looks to overtake AWAY, I expect AWAY to face future pressure in organic search rankings.

Historically AWAY has achieved historical organic revenue growth of around 22% for FY2012, and FY2013, and looks to do around the same in FY2014 as well. This growth has roughly been split between subscription listings growth and average price per subscription listing increases. Price increases have been driven by base price increases and increase adoption of higher priced subscription offerings which enable more favorable positions in search results. Bulls believe that AWAY can continue to increase pricing 10% a year as $450 a year is a small percentage of a rental property that may be generating $20,000 a year of rental income. This seems to conveniently ignore an increasingly competitive industry that is has transitioned to towards a free to list pricing model. Notably the historical leader before AWAY in online vacation rentals was craigslist, which has always been free to list. Furthermore, as AWAY attempts to focus on user experience by devaluing the importance of premium listings on search sort order, this reduces its ability to up sell these more expensive subscriptions.

Valuation

For a name that as experienced 22% historical organic revenue growth, AWAY is quite expensive, even if you ignore high levels of stock based comp in the non-GAAP numbers. I note that these high earnings multiples are despite the company already operating at a respectable non-GAAP EBITDA margin of 27% and having limited opportunities to expand margins further with scale. Notably, EPS excluding amortization of intangibles (and normalizing for tax rates) has been flat over the past two years despite revenue growth.

High growth Internet names have valuations largely correlated with their organic top line growth rates. Considering AWAY’s more moderate growth rate, I find them as expensively valued as market darlings such as LNKD and Z, but with a worse business model and one that is being disrupted by stronger competition. This valuation gives me confidence that the market has mispriced the risk of competitive disruption on AWAY’s financial results.

Assessing the risk of AWAY as an acquisition candidate

While I don’t have much special insight here, I believe the risk of AWAY being acquired is low. AWAY is of no strategic value to most internet players, and I believe of only modest strategic value of OTAs. PCLN would be the most likely acquirer, before they made the decision to develop their internal vacation rentals brand. An acquisition by EXPE would be very dilutive given the size of the respective companies and AWAY’s high valuation. I believe even for an OTA acquirer, there would only be moderate cost synergies and very few revenue synergies, as hotel shoppers are not really looking for vacation rentals when shopping for hotels. Furthermore, I note that potential acquirers like PCLN and TRIP seem to have been able to replicate the supply side of the AWAY network with ease.

Disclaimer

The author is currently holds a short position in the security. Author may sell additional shares or cover some or all of these shares at any time. Author has no obligation to inform anyone of any changes to Author’s view of AWAY. Please consult your financial, legal, and/or tax advisors before making any investment decisions.  While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note.  The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in PPC US.  READER AGREES TO HOLD AUTHOR HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE. 

Catalyst

Weakening financial results highlights competitive threats causing stock ro rerate.