HomeAway (AWAY) is one of those small-cap, growth stocks that appreciated sharply during 2013, rising by 85.8 percent from Dec. 31, 2012 to Dec. 31, 2013. However, like numerous other momentum stocks, AWAY fell substantially during the first half of this year, declining by 36.6 percent from Feb. 20 to May 20.
After rallying by 6.8 percent from May 20 to May 27, AWAY declined further during the first two weeks of June, falling to an intra-day low of $27.95 on June 9.
Yet, price-momentum and volume statistics indicated on that day that AWAY had fallen to an oversold level and that it was due for a rebound. Sure enough, the stock did rebound considerably over the ensuing days, rising by 11.6 percent from June 10 to June 13, to close last Friday at $32.25. It closed Thursday at $33.56.
So, I felt that the time had come for me to take another look at HomeAway and its stock.
After all, subscribers to my financial market newsletter had made some good gains in AWAY during 2013.
Unfortunately, I was not impressed with my findings. Quite the contrary, my research indicates that financial market participants are still overvaluing HomeAway’s stock substantially and that AWAY will resume its February 21 to June 9 downturn within the next few days.
Before discussing the reasons that led me to that conclusion, let’s review some general information about HomeAway.
HomeAway.com (AWAY) operates the world’s largest online marketplace for the vacation rental industry, with sites representing approximately 952,000 paid listings of vacation rental homes in 190 countries. As of Dec. 31, 2013, the Austin, Texas-based company operated its online marketplace through 50 websites in 21 languages.
HomeAway’s rental properties are fully furnished, privately-owned residential properties, including homes, condominiums, villas and cabins that can be rented on a nightly, weekly or monthly basis.
The company’s global marketplace brings together millions of travelers seeking vacation rentals online with hundreds of thousands of owners and managers of vacation rental properties located around the world.
Visitors to the company’s web sites can search and compare, at no charge, HomeAway’s extensive inventory of listings to find vacation rentals that meet their specific requirements.
In addition to its online listings of vacation rental properties, HomeAway operates BedandBreakfast.com, the most comprehensive global site for finding bed-and-breakfast properties.
During the year ended Dec. 31, 2013, the company’s web sites attracted approximately 750 million visits, as compared to approximately 600 million visits during 2012 and 500 million visits during 2011.
HomeAway’s ambition is to make every vacation rental in the world available to every traveler in the world through its online marketplace.
Why I think AWAY is Headed Lower
Although I expect the online vacation rental market to continue to grow at a fast pace over the next few years, HomeAway’s stock appears to be way overpriced, with my analysis indicating that AWAY is worth no more than $7 per share.
That $7 per share valuation estimate is based on an assumption that HomeAway will grow its net earnings per diluted share at an average annual rate of 30 percent over the next three years. Yet, that valuation estimate might still be too high, considering the following:
- For the year ended Dec. 31, 2013, HomeAway grew its net income attributable to common stockholders by only 18.2 percent and its net earnings per diluted share by only 11.1 percent.
- HomeAway announced on March 24 that its management team expects the company’s adjusted earnings before income taxes, depreciation and amortization expenses (“EBIDTA”) to rise to a range of range of $117.0 to $122.5 million for the year ending Dec. 31, 2014, from $96.7 million for the same period a year ago – by no more than 26.7 percent compared to the year ended Dec. 31, 2013. The company did not give any projections for its net earnings or net earnings per share.
- HomeAway is likely to face an increasing degree of competition during the years ahead from other vacation and short-term rental listing websites such as TripAdvisor.com, Airbnb.com and HouseTrip.com, as well as from online travel websites, such Expedia.com, Hotels.com, Kayak.com, Booking.com, Orbitz.com, priceline.com and Travelocity.com. Any such increases in competition would likely reduce HomeAway’s revenue and earnings growth.
- HomeAway’s stock closed Thursday at a price-to-earnings multiple of approximately 170 – at a P/E to earnings growth rate (“PEG”) ratio of approximately 5.7, based on an estimated average earnings growth rate of 30 percent for the next three years.
My Advice for Investors and Stock Market Speculators
As a result of my analysis of HomeAway, and the fact that the trading action in the company’s stock over the past three days suggests that it will turn lower within the next few days, I would advise investors to stay away from AWAY.
A much better alternative for investors seeking investments in companies that operate vacation rental listing websites would be TripAdvisor (TRIP), which I discussed in a previous article.
Separately, I would advise aggressive stock market speculators to consider selling AWAY short.
David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.
In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.
David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.