HomeAway Shares — 3 Pros, 3 Cons

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For the next couple months, the IPO market is likely to be fairly inactive. However, there should be lots of action in the fall, with offerings from companies like Groupon and Zynga.

But ahead of the summer doldrums, one company just launched its IPO:  HomeAway (Nasdaq:AWAY), which operates a marketplace for vacation rentals.  These include residential properties, condos, villas and cabins.

HomeAway priced its deal late Tuesday at $27.  So far in Wednesday’s trading, the shares are up hefty 42%.

But is there still more room for investors to make gains on the stock?  Here’s a look at the pros and cons:

Pros

Large marketplace. Based on data from Media Metrix, HomeAway’s websites attracted 220 million visits last year.  To profit from this, the company charges roughly $300 a year to property owners for listings.  As a result, it has a high amount of recurring revenue.

Interestingly enough, HomeAway has been launching add-on products to grow revenue, including credit card/check acceptance, travel insurance and tax planning.

Acquisitions. Since 2005, HomeAway has raised roughly $500 million in venture capital.  A big part of this has been for purchasing websites —  why build a site when there are already dominant players in a market?

The strategy has worked quite well and has helped to quickly scale the business.  Last year, HomeAway generated $167.9 million in revenue, up 39.6%.  There was also free cash flow of $51.4 million, which helps that the company gets advance payments for its subscriptions.

Recession-resistant. During the 2008-2009 recession, HomeAway did not experience a slowdown in its business.  Why?  Property owners have even more money from vacation rentals.  At the same time, vacationers want a cost-effective option for lodging.

Cons

Branding. According to research from Ipsos Reid Public Affairs, fewer than 30% of adults in the U.S. had an unaided awareness of vacation rentals.  In other words, HomeAway will likely need to spend aggressively on advertising to get more traffic – the company even sprung for a Super Bowl commercial earlier this year.

Competition. It is certainly intense.  Rivals include TripAdvisor, VacationRoost and Airbnb.  There is also pressure from time-share companies as well as large Internet portals like eBay (Nasdaq:EBAY), Google (Nasdaq:GOOG) and Microsoft (Nasdaq:MSFT).

Management. Since inception, HomeAway has purchased 17 businesses across various countries.  While it has proven successful so far, there are certainly risks to this strategy.  It can be incredibly difficult to integrate new companies.  Consider that HomeAway still has not been able to consolidate the listings from all its acquisitions.

Verdict

A report from Radius Global Market Research estimates there are more than 6 million vacation properties in the U.S. and Europe, with a market size of $85 billion per year.  HomeAway believes that its own opportunity is about $8.5 billion.  This is based on the comparable penetration rates of online hotel operators, like Priceline.com (Nasdaq:PCLN) and Expedia (Nasdaq:EXPE).

Thus, it looks like HomeAway is still in the early stages of a big growth opportunity.  And, it is positioned nicely to benefit.

The pros outweigh the cons on the stock.  However, for investors, it is a good idea to wait a few weeks before buying the IPO.  As seen with other hot deals – such as LinkedIn (NYSE:LNKD) – there is often lots of volatility.

Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.”  You can find him at Twitter account @ttaulli.  He does not own a position in any of the stocks named here.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2011/06/homeaway-shares-3-pros-3-cons/.

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