HomeAway, Inc. (NASDAQ: AWAY) shares could be among the best potential 2014 performers in the mid-cap Internet space as the company rolls out its pay-per-booking (PPB) model, fine- tunes its operations, and then ramps marketing its spend into 2015 to drive growth through the new model.
HomeAway operates the largest vacation rental marketplace globally, with websites in 11 languages servicing 145 countries. Users can search for and compare vacation rental properties on the company's websites for free. HomeAway charges property owners subscription fees to list spaces for vacation rental.
The company guided for core subscription listings growth in the fourth quarter. The PPB transaction value per booking, thus far, looks similar to the core vacation rental business (e.g., over $1,000 per booking).
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"Early commentary around the rollout of PPB alongside the subscription model points to substantial lifts in conversion of traffic to listings, limited cannibalization and compelling listings quality," Deutsche Bank analyst Lloyd Walmsley said in a note to clients.
Meanwhile, the PPB listings backlog from property managers, which is set to go live in the next few weeks, suggests a rapid ramp to more than 35k by year-end. Management's commentary around the early PPB transition exceeded the market expectations even if the guidance for productivity of listings (1 turn per year) seems conservative.
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"Despite strong early feedback, the transition to PPB remains early with potential transitional issues. The company guided conservatively for the PPB revenue contribution in 2014, as the initial placement of these listings will be at the bottom of search results," Walmsley said.
Despite these risks, the company has know-how from BedandBreakfast.com where the company has a hybrid subscription/PPB model.
Over time, PPB listings should get more exposure, vi! a initiatives such as re-distribution to online travel agencies (e.g. the Expedia deal) or through SEM (search engine marketing) spending, where the company can drive traffic to transactional listings on a profitable basis.
HomeAway has seen steady growth in the update of both online payments and online bookings across its two core sites, HomeAway.com and VRBO.com. HomeAway continues to show solid growth in users, page views and time spent across HomeAway Sites.
"We prefer to look at look at HomeAway on FCF multiples / yields, as this metric better matches the attractive cash collection cycle of the business," Walmsley said.
On the valuation front, AWAY trades at a blended average of 3.5 percent FCF yield and at 20 times 2015 EV/EBITDA given the high visibility subscription model.
However, HomeAway has yet to prove it can scale the surfacing of these listings in search results in such a way that drives bookings and revenues without reducing the value proposition of core subscription listings.
But, it will take time to drive traffic to these listings without interfering with the core, cash-cow subscription listings.
Nevertheless, the transition makes sense and could work. It might not be a bad idea for investors to add positions before success becomes more evident.
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