Ever since the travel industry migrated from agencies and city ticket offices onto the Internet, it seems like there are an infinite number of virtual businesses to take advantage of this move. As usual, I thought I knew them all. Of course, I was wrong. There’s always one more, and it often is a great company I totally overlooked.
In this case, it’s HomeAway (NASDAQ:AWAY). The company operates an online marketplace for the vacation rental industry, consisting of homes, condos, villas and cabins, rented on a nightly, weekly or monthly basis. It also sells complementary products, such as travel guarantees and property management software and services. The portfolio of websites include HomeAway.com, VRBO.com and VacationRentals.com in the United States and numerous offshoots for the U.K., Germany, France, Spain, Brazil and Australia. It is, in essence, a bit like eBay (NASDAQ:EBAY) for the vacation rental industry.
The company is a recent IPO (last year), and it attracted almost half a billion visits and 640,000 paid listings. The company’s revenue comes from these paid listings, which sport a 75% renewal rate, indicating the renters like the program. Costs are mostly derived from personnel and marketing expenses. The key to HomeAway’s continued prosperity will be branding and ever-enhancing functionality. Given the strong growth in listings and views over the past few years, AWAY is doing just fine.
First-quarter earnings show just how strong things are at HomeAway. Revenue was up 23% year-over-year, trailing 12-month free cash flow was up 39% YOY, cash on hand is $222 million and it has no debt. Paid listings leaped 21% and website visits increased 17%.
Pretty great all around, if you ask me.
As for valuation, 13 analysts are projecting long-term growth of 33% annualized. Even if we accept that premise, that means the stock should be trading at around $17 based on FY12 earnings of 50 cents per share. If you back out the $3 per share of cash the company has, it’s still trading at an effective price of $22.85. I’m also disappointed that insiders only hold 1% of the shares, so their interests are not aligned with shareholders’.
Even at these prices, there is one reason to buy in. A number of private equity firms hold stakes in the company. HomeAway is a cash flow business, and private equity loves cash flow. They aren’t the only ones. This company would make a perfect addition to the e-commerce travel-related portfolios of both IAC Interactive (NASDAQ:IACI) and Liberty Interactive (NASDAQ:LINTA). Both Barry Diller and John Malone have shown that they will aggressively pursue businesses that are exactly like this one.
That might not mean that a floor exists on the stock’s price, but it says to me that as long as HomeAway executes on its plan, a buyer will always be circling.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.