HomeAway, Inc. (NASDAQ:AWAY) stock has underperformed the returns of the S&P 500 by roughly 20 percentage points over the last year, losing about 5% as the benchmark rallied 15% higher.
That’s pretty bad, but it’s not enough.
I hope and pray that AWAY stock will continue to plunge with all the fervor of a cartoon anvil going forward. Not for financial reasons — I’m not shorting shares or betting on a HomeAway meltdown in any way — but for what I guess you could call moral reasons.
When stocks become wildly overvalued it makes me physically ill, because I proactively mourn for investors caught up in the inevitable selloff.
There are a few simple reasons HomeAway stock is still a screaming sell, even after its lackluster recent performance.
The Problem With the AWAY Stock Price
First things first: HomeAway is a vacation rental site, and it’s not unique in the space. The far-larger Tripadvisor Inc (NASDAQ:TRIP) is also in the space, not to mention a couple other heavy hitters you’ve probably heard of: Craigslist and Airbnb. So, there’s plenty of worthy competition, plus barriers to entry aren’t high, either.
Not exactly a great endorsement of AWAY stock.
But a stock can still be attractively valued in the face of intense competition. That’s certainly true. But AWAY trades at insane price-to-earnings multiples that imply mind-blowing growth is an inevitability. Its P/E sits at 225 today, and HomeAway shares trade for about 46 times forward 2015 earnings and nearly 40 times estimated 2016 earnings.
Normally, numbers like these tell you that Wall Street is expecting some eye-popping growth in coming years, which the company should eventually be able to bring down to the bottom line as scale and cost control measures improve.
At least, in saner times, that’s often what these multiples mean.
But AWAY is expected to grow revenue by a mere average annual clip of 16% in 2015 and 2016. In the last four years, top-line growth has clocked in between 21% and 37%. Growth is decelerating — markedly.
Unfortunately, this sort of unabashed irrational exuberance isn’t unique to HomeAway. It’s being seen elsewhere in its own niche industry. Peter Thiel, the PayPal billionaire and early investor in Facebook Inc (NASDAQ:FB), has lavished praise on HomeAway competitor Airbnb, saying in September 2014 that:
“Of the consumer internet businesses in Silicon Valley, the one I’m probably the most bullish on at this point would be Airbnb. I think that definitely has the potential to become the next $100 billion consumer Internet business.”
Perhaps the market is conflating this (similarly obscene) bullishness surrounding Airbnb with the idea HomeAway must deserve a sky-high valuation as well.
Whatever the rationale, it’s becoming more and more common in today’s market: The current P/E ratio (just over 20) of the S&P 500 is more than 30% higher than its all-time average of 15.5.
In other words, AWAY stock isn’t the only overvalued company in the market, and actually it’s becoming rather pervasive. But HomeAway’s decelerating growth, the high competition in the space and its lack of a true competitive advantage each combine to make its ridiculous valuations simply unappealing for value-minded investors.
I’ll be staying far away from AWAY stock, you can bet on that.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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