If Airbnb’s Worth $10B, HomeAway’s A Bargain

News earlier this month that Airbnb had arranged a funding round of as much as $500 million, valuing the company at about $10 billion, seemed like good news for couch owners everywhere. This informal renting out of one’s couch, extra bedroom or entire apartment must really be taking off, eh?

It’s a shame Airbnb remains privately-held and we therefore can’t get a look at the financial results to date.

The Wall Street Journal reported that Airbnb had 2013 revenue of about $250 million and the company’s web site says it holds more than 600,000 listings. We also learn from Airbnb’s site that listing your pad is free, so no telling how many of those listings generate revenue or how much; the company only makes money if someone rents out whatever accommodation you’re offering – 3% of the rental amount from you, and 6%-to-12% of the rental amount from the renter.

Fair enough. Certainly, if every back bedroom on earth joins the listings – or every empty apartment, or every apartment someone is willing to vacate for a while – the business could grow quite large, and the $10 billion valuation against $250 million in revenue won’t look so crazy. Smart names like TPG, T. Rowe Price (TROW) and Sequoia Capital – among the latest round’s investors – apparently see big things ahead.

There are regulatory hurdles already popping up, of course. The whole operation amounts to an informal hotel network, but is largely avoiding the taxes and consumer protections that the Hyatt (H) and Marriott (MAR) chains deal with around the world. But assuming Airbnb, like Uber and its taxi commission headaches, overcomes those issues, it has fabulous growth potential, and the VCs and private equity people who have been funding it could do quite well.

Airbnb allows sophisticated investors to check off two of their favorite boxes: one, it’s disruptive to a large and established market, in this case hotels and such; and two, it can benefit from a network effect, with a rising number of listings attracting more and more travelers, which encourages more listings, and so forth.

Much of this also describes a company that went public in 2011, HomeAway (AWAY), which operates its namesake web site, VRBO (Vacation Rental By Owner) and some 48 others.

HomeAway boasts 890,000 paying listings. That’s right, it charges rental owners, typically collecting an annual subscription fee, and its revenue per listing was $368 in 2013. These rental owners pay up front, too, bolstering HomeAway’s cash flow. The company had 2013 revenue of $346.5 million, net income of $17.7 million, and is growing rapidly. HomeAway’s ambition, it says, “is to make every vacation rental in the world available to every traveler in the world.” It is disrupting hotels, too, and benefits from a network effect.

AWAY Chart

AWAY data by YCharts

In the weeks Airbnb was triumphantly wrapping up the investment that would give it a $10 billion valuation, however, HomeAway was among the tech stocks getting hammered, losing about one third of its value in a plunge alongside Yelp (YELP), Twitter (TWTR) and other well-known names. Excitement about companies that are already listed, it seems, trails the hubbub over the Next Great Thing. HomeAway’s market cap was cut to about $3 billion.

Which leads to the obvious question: based on Airbnb’s valuation, is HomeAway a screaming buy?

Not by value investing metrics, it isn’t. There’s no dividend and none likely to come for years. Even after the stock plunge of recent weeks, the PE ratio is at about 160. And HomeAway trades at about eight times sales. Johnson & Johnson (JNJ) it’s not.

But investors looking for a play in the rapidly evolving online travel business might nevertheless be intrigued. First, let’s distinguish HomeAway from Airbnb. HomeAway serves the established vacation rental market, properties that are rented out 12 months out of the year, managed professionally and offer a fairly predictable consumer experience. Airbnb began in the do-it-yourself space and still draws much of its listings there – regular people deciding to earn some income renting out part of all of their pads. The two companies, as they grow, are becoming more like each other, with HomeAway taking on funkier listings and Airbnb moving upscale. They’re different but, make no mistake, they’re direct competitors, and you’ll find plenty of properties that are listed on both sites.

Though it’s already a listed company, HomeAway, too, is in its early stages, investing heavily to build scale, both via acquisition (it bought Stayz, which is describes as Australia’s leading online vacation rental marketplace, for $197.3 million in December) and organically. Sales and marketing costs consume about one third of revenue, though that figure has been declining slowly and steadily. Notably, it seems an efficient advertiser, spending $39.1 million last year, mostly on online ads, to generate its $346.5 million in sales. By comparison, the online travel industry’s champ, Priceline (PCLN), spent $1.8 billion last year on online advertising to generate $6.8 billion in revenue, and it’s considered highly efficient in converting ads-to-traffic-to-sales.

Paid listings grew, including those from acquisitions, by about 25% at HomeAway last year. Rental property owners renewed at a 72.5% rate, so HomeAway has to sign up lots of new properties just to stay even, and growing rapidly is a huge task, but one it has been pulling off nicely. HomeAway smartly gives away its reservation management software to rental owners as a way of tying them to the site.

Consumers, it seems, are in the early stages of embracing non-hotel accommodations when they travel. The alternative lodging has some big advantages: it’s often far cheaper than a hotel, especially for families, and much more spacious; with a kitchen, you can eat one or more meals in, a big savings and a convenience; the rentals are often in neighborhoods occupied by locals, not tourists, and that’s a more authentic travel experience.

Priceline’s booking.com lodging site, which represents the great bulk of the company, is busy adding apartments, villas, vacation rentals and other non-hotel properties to compete directly against HomeAway and Airbnb. Both of these young companies could grow, become increasingly profitable and live up to investors’ high expectations. Or, as the online travel industry becomes more competitive – and companies within it become more determined to keep growing – HomeAway and Airbnb could be acquired by larger players. Either way, their lofty valuations are based on leading positions in a market expected to grow rapidly for years to come.

In recent weeks, YCharts has focused on travel-related stocks: Priceline and its brilliant booking.com acquisition; Expedia (EXPE), which badly lags Priceline in the lucrative foreign hotel market; TripAdvisor (TRIP), with a strong competitive position by virtue of its huge base of content, but pricey; Google (GOOG), which is the ultimate online travel winner because all the other players buy ads from it; and Hertz (HTZ), set to benefit from a coming spinoff of its equipment rental business. Unleash some financial advisor tools to learn more.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  travel   tech stocks   

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