With travellers increasingly looking at rented accommodation as an alternative to hotels, all eyes are on what HomeAway does next. Sally White reports

Talk about a wake-up call! Since HomeAway announced a few days ago that its vacation rentals would be displayed on Priceline’s Kayak site the shares have shot up by over 10%.

To the techie analysts HomeAway’s move has revealed the eagerness of the online travel majors to gain exposure in the ‘for rent by owner’ market. Its numbers show an increasing use by holiday-makers of alternatives to hotels.

The Texas-based company has also become the latest tip for consolidation in the online holiday business with Priceline, Expedia and TripAdvisor all being named as potential acquirers. At a price, of course! Against the current share price of $31.06 (giving a market value of $3bn), the range that analysts have come up is $45-$60 and more. That compares to the last 12 months’ range of $25-$37.  Even at the current price its rating is dizzy-making!

Lower profile than the other major in the rental market, Airbnb, HomeAway has well over 1m vacation rental listings. The ten-year old company, co-founded by CEO Brian Sharples, has a presence in 190 countries and at last count operated through 40 websites in 22 languages.

Its business model is different from privately-owned Airbnb in that it makes most of its money from subscriptions paid by owners; though analysts observe that they moving into each other’s markets. HomeAway’s average customer stays around a week and spends $2,000 - a much longer stay and more upmarket experience than the trade’s description of Airbnb’s rental customers. (Airbnb tenants rather than owners pay).

Growth has come mainly from acquisitions, HomeAway raising money to pick up sites offering second-home vacation-by-rental listings around the world, consolidating them on a single platform. It received well over $400m in venture capital funding before being quoted in 2011, attracting the likes of Google Ventures and Redpoint Ventures.  

Pouring money into marketing

Recently it put its foot on the accelerator to speed up its growth rate, hiking its marketing and technical development spend. Last year it raised marketing spend from $113m to $155m and development from $58m to $77m and that trend, it says, will continue.

 The marketing seems to be paying off - total revenue increased last year by 28.9% from $347m to $447m. At the end of the fourth quarter, 714,000 of the listings were subscription listings and 329,000 were performance-based listings. (It is the latter that is now more likely to lead growth.)

Average revenue per subscription listing during 2014’s fourth quarter was $477, on a like-for-like currency basis there was an increase of 13.6% compared to the previous year.Visits were 177.6 million during the fourth quarter, a year-over-year increase of 21.7%

Commenting on its future growth HomeAway states: “In the future, we believe it will become more important to increase marketing investments to grow and further advertise our brand and products to travellers. We have seen other companies launch online businesses offering vacation rentals or other alternatives to hotels. We believe this growing favourable awareness of alternatives to hotels has and will continue to support growth in our business. “

It makes no attempt, however, to quantify its potential market.

What the analysts did not like so much was that last year net income attributable to HomeAway was only $13.4 million, or $0.14 per share, because of the chunky increase in spending. (It compared to net income $17.7 million, or $0.20 per share, in 2013.)  Mainly for that reason they knocked a few dollars off the share price. However, now that the take-over possibilities are being aired they’ve cheered up and the price has recovered!

This year, according to HomeAway, “total revenue is expected to be in the range of  510m to $520m, representing year-over-year growth of approximately 14% to 16%”. On a like-for-like currency basis it expects growth of approximately 21% to 23%.

Search engine improvements

An analysis of the business prospects for HomeAway from broker Macquarie Capital rates its search engine marketing as improving fast. It noted that HomeAway’s paid searches were 21% of the Google total earlier this month, up from 19% in May and 13% in March. HomeAway was also identified by the broker as the ‘clear’ organic search leader, with 47% of the first five organic Google listings for relevant search.

Airbnb remained the most visible brand in Google’s top/first ad slot with a 24% market share, however, this was down from 41% in March. TripAdvisor was the only other large vacation rental provider that increased its search visibility in the second quarter.

So, HomeAway seems to be spending its way to increased popularity all round – holiday-makers and investors. But that is not what the take-over price projections are based on. Those prices reflect the view that the company can change its business model and increase its revenue from transactions. It could perhaps move up from the current 3% of each rental towards the 10% charged by most US rental brokers.

Even at around 8% of transaction, say the analysts, it is possible to come up with a value for the company of just under $6bn. That is not a huge mouthful for the market’s favoured predator Priceline, with its market valuation of $61bn and very little borrowing!