Description

I am recommending a short position on Home Away (AWAY). Home Away is a great idea, backed by Tier one venture backers, with wide consumer appeal, but is trading at an absurd valuation. While it’s growing quickly I don’t see any remote possibility that it will be able to grow into its valuation, and see trends that indicate growth is slowing. It has certainly traded higher and I wish I had written its up earlier but in any case I think you can expect at least 50% downside at current prices as company’s growth slows, competitors emerge and most importantly as the IPO lock-up expires and insiders shed shares(huge amounts of the outstanind)  next week and early into next year.

The business- www.homeaway.com

Think about Home Away as an eBay/market maker for vacation properties in theUSandEurope. Owners of properties list their property on the site for a fee, and potential renters get to use the site for free to peruse properties and make bookings etc. The site provides owners with some value added features as well to manage payments, scheduling etc. But the bulk comes from a subscription based listing fee in the range of $250-$300 per year, which in general has done pretty well with 75% renewls.

The company has experienced significant growth but a large portion of that growth has come from roll-ups of other domestic and international properties that offer similar offering but more targeted to a local market. The resulting website is a conglomeration of 20 different IT systems, that don’t hang together well, and I suspect the company will spend significant resources to get things working together in the coming years.

The business is pretty simple and straight forward. They help supply meet demand, and charge for it. It’s a good business just not a good investment given the price. Given that the business is pretty simple I will focus on some of the key operating metrics, the metrics in light of the opportunity at large and then valuation and catalysts.

The opportunity at large

By the company’s own measure there exists roughly 20 mm vacation properties worldwide (within their target market). They currently have roughly 625K paid listings on their site. The vast majority of the potential universe of properties are not rented by their owners, i.e. 2/3 of second home owners don’t rent out their property. We could surmise as to why but I think most folks that have vacation properties who don’t rent them is because they are wealthy enough to not need the income versus the pain it is to rent it out and manage the headache.  So I think their real addressable market is really the properties that are in the actual rental pool, which stands at about 1/3 the total – roughly 6 mm properties.  Right now Home Away has about 10% market share of active rental, with a 75% renewal rate on those listings.

See the company presentation @

http://files.shareholder.com/downloads/ABEA-6A2WZS/1536810097x0x522441/9b39146c-6cfe-4f81-8788-2d744f20d23d/AWAY%20JPM%20Investor%20Presentation%20%28Nov%2030%202011%29_vFINAL2.pdf

Not the next  hotwire/Priceline

I think properties like Hotwire and Priceline have unique advantages over Home Away. Basically both those properties sell services that have consistent offering, with consistent expectations by the demand side of the equation, via the hotel star system. Consumers have a very good idea of what to expect from their purchase. For example, with a young infant, I enjoy staying at a 4* property because I know they will have a crib, and a certain level of service and amenities. It’s much harder for me to get to that level of detail at a Home Away listing which might vary widely, even though it might be a high-end listing.  I do agree that over time as people leave reviews that this risk diminishes, but that level of reviews will take years for Home Away to build up.

Valuation

Fully Diluted Shares Outstanding - 92.5 mm

Share price- 23.30

Market Cap – 2.145 B

Excess  Cash – 50 m

EnterpriseValue – 2.095 B

EV/EBITDA 2010 (adjusted EBITDA)* - 48X

EC/EBITDA 2011(estimated)- 31X

EV/REVENUE 2010 – 12.5X

EV/REVENUE 2011(estimated) – 9X

Given the software nature of the business EBITDA is not too far from EBIT, and I think FCF is hard to calculate given this has been a growth start-up so I have stuck to numbers as reported. Obviously FCF multiples would be even higher.

Summary:

I think you have a good business that has largely been built via roll-up and buying web traffic. The offering is not unique, and barriers to entry are not high. I think the company lacks significant pricing power and by no means is a category leader like Amazon or Google. As the hype dies down and the insiders sell we should see a dramatically lower share price.

Risks:

Take out by a company like EBay that needs growth from other verticals, and might pay to acquire their platform.

Catalyst

To me the real Catalyst here is the amazing amount of shares that will come off of lock-up and likely flood the market and at the very least keep a lid on the stock for the foreseeable future.

On Dec 26 you will see the VCs and other investors come off lock-up representing 22% of the outstanding shares and then in February of next year is when the company insiders come off representing another 65% of shares. I think you will see folks shedding these shares to lock in riches and as the insiders head for the exits the stock will ultimately crater to a more reasonable valuation.