VCSA - Vacasa: Lack Of Short-Term Catalysts Hold

2023-06-19 00:53:22 ET

Summary

• Vacasa stock remains stagnant despite better-than-expected 1Q23 revenue due to management's guidance of a volatile demand environment and persistent supply churn issues.
• The company's short-term catalysts for stock rerating include visible demand and achieving EBITDA targets to demonstrate sustainable, profitable growth.
• In the long run, VCSA has long-term growth potential due to the increasing popularity of alternative accommodations in the travel industry.

Description

My concern regarding Vacasa ( VCSA ) facing a period of "winter" with no incremental investors likely to purchase the stock until VCSA shows improvement in executions was right. The stock went on to drift downwards to new lows. I believe investors are simply sitting on the side lines on VCSA until the business has shown credible turnaround, with sustainable results rather than a path to it. Evidence of this can be seen from the stock price action post the latest results. Despite 1Q23 revenue performing better than consensus expectations, the stock did not show any signs of positive movements because management mentioned that the current demand environment remains volatile. To make things worse, supply churn issues continue to persist (albeit not worsening). These revisions carry far more weight than management's remark that they are prioritizing efficiency over growth in the coming quarters in order to reach their target of adjusted EBITDA profitability by 2023. Lastly, the resignation of key management is never a good news during a turnaround situation.

In my opinion, the short-term catalyst for the stock to rerate higher is when demand becomes more visible (which is somewhat dependent on the macro environment), and VCSA manages to capture the coming upcycle. The second catalyst to further push the stock higher is management executing on its EBITDA targets to show investors that it can drive sustainable and profitable growth. Once VCSA can get past the short-term volatility, In the long run, I still think that VCSA has a solid growth path because alternative accommodations are becoming more popular with consumers and getting a bigger share of the market, which is a long-term trend in the travel industry. Overall, I recommend a hold rating until the short-term catalysts surface.

Near-term outlook

The main reason for my hold rating, although valuation looks cheap, is that I think near-term growth outlook is not going to be pretty. This is also well reflected in management guidance, in which despite 1Q23 revenue coming in better than expected (driven by ADR), management reiterated guide for FY23 revenue to decline by low-double-digits to high-single-digits. From a stock narrative perspective, this is not positive at all as investors that are expecting for better-than-expected FY23 (vs management guidance) will not throw these hopes out of the window for the time being. In addition, existing shareholders that anticipated things to recover sequentially would tamper their expectations as the reiteration of guidance implies a more conservative progression through remainder of year. If the management is expecting a weak recovery, and the stock sentiment is bad, I don't see why one should risk taking a position now. Though, I acknowledge that it is extremely tough for management to gain visibility into demand trends now as the macro environment remains extremely volatile. If management were to guide higher and miss, then, we could see 4Q22 repeat again. It's a lose-lose situation for VCSA in the near term.

Home churn is a problem to address

One area I had hoped to see more progress in is the escalating rate of homeowner churn, which persists even as record-high rental income rates show signs of moderating. Despite management's assurances that churn has not increased since 4Q22, the problem remains. This has an immediate impact on VCSA's ability to grow in the near term (less supply), and a much more impact during the next upcycle. When demand hits back, which I think it would eventually, VCSA must have sufficient supply to ride that recovery wave. Positively, VCSA is proactively addressing and enhancing the heightened churn rates by actively engaging with homeowners, particularly those who are new to the platform. Additionally, VCSA is providing homeowners with access to advanced data tools that allow them to closely monitor and track various performance metrics, facilitating better management of their rental properties. I would expect to see improvement in this metric as we move through this year and head into FY24.

Margin

The positive takeaway so far, which investors are not paying attention to given the other weak aspects is the 400bps improvement in adj. EBITDA margin. This is encouraging news because it demonstrates management's continued dedication to maximizing profits, as evidenced by the reiteration of their goal to post positive EBITDA in FY23. Recent cuts in staff across the company have resulted in greater operational efficiency, leading me to believe that this goal is within reach. Improvements in sales force productivity and the efficiency with which they are being implemented are also contributing factors to this upbeat prognosis. To give some background, in October 2022, VCSA initiated a workforce restructuring that resulted in the dismissal of 280 corporate employees. The company began its second round of layoffs in late January, cutting 17% of its workforce (or about 1,300 jobs) across the board, including the local operations team and corporate functions. I believe these actions have helped streamline the business in terms of operations efficiency, allowing VCSA to run a tighter ship moving forward. As such, the long-term potential margin is now higher.

Summary

Considering the near-term outlook, I maintain a hold rating due to the anticipated lack of positive growth. The market is waiting for tangible improvements and sustainable results from the company before considering any significant investments. Despite better-than-expected revenue in the first quarter, the stock did not respond positively due to management's acknowledgment of a volatile demand environment. Supply churn remains a persistent issue, which hampers short-term growth prospects and potentially the long-term growth. Management's guidance indicates a decline in revenue for FY23, further dampening investor sentiment. The 400-basis-point improvement in adjusted EBITDA margin is a positive development that showcases management's commitment to profitability. Overall, VCSA has the potential for long-term success, but short-term catalysts are needed for the stock to rerate higher.

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