The continued decline of the market is a great opportunity to look for beaten names that could be big winners during the next bull market.
Travel could be a great place to start — an industry survey of travel agents noted optimism that travel and tourism will return to pre-pandemic levels next year.
Airbnb (ABNB -4.90%) went public in late 2020, just months before many growth stocks peaked. After rising from an IPO price of $68 to over $200 a share, the stock has since fallen, but buying Airbnb now could make you look like a genius later.
The company is a cash cow
Airbnb provides a platform that allows homeowners (“hosts,” in the company’s parlance) to rent out their homes and other properties or offer experiences to travelers. Users can book a place to stay from a listing on the Airbnb app or website. The company’s reach is worldwide with more than six million listings in 220 countries. About 150 million people use Airbnb.
When you think of travel, you might think of airlines, hotel chains, or cruise lines. But most of these businesses are competitive in price and require constant investment. For example, airlines have to buy and maintain a fleet of aircraft, while travelers only care about getting the lowest ticket price.
Airbnb is more like a technology business than a traditional travel company. It doesn’t own many hard assets like planes, buildings, or ships, and it’s producing a ton of profits as a result.
Airbnb has generated $2.9 billion in free cash flow over the past four quarters, including $795 million in the second quarter. The company generated $0.38 of free cash flow from every dollar of revenue last quarter – an excellent free cash flow margin. In addition, management announced a $2 billion share repurchase program as a result of generating more cash than it needs to continue to grow the business organically.
Travel recovery is already underway
Airbnb has also bounced back from COVID-19 when authorities virtually shut down travel to prevent the spread of the virus. The company’s second quarter results showed that nights and experiences booked reached an all-time high of 103.7 million for the quarter, surpassing 100 million for the second time.
Booking volume (total value of all bookings) reached $17 billion with revenue of $2.1 billion, up 27% and 58% year-over-year, respectively. Both indicators exceeded pre-pandemic levels.
Now recovered from COVID-19, growth could slow going forward if the economy softens enough to put a damper on travel. However, that doesn’t mean Airbnb’s growth tank is running out of gas.
Remember that 150 million people seems like a lot, but Airbnb is a worldwide business with listings in more than 100,000 cities. The global population is nearly eight billion, leaving plenty of room for long-term growth. Airbnb has become a category-defining word, as Kleenex is to facial tissues. The company faces competition from hotels and other travel websites, but the company has amassed significant brand power as a pioneer in the industry.
The stock is attractively valued
I love a good treasure hunt; sometimes, X marks the place. You can see in the chart below that investors have been selling stocks fearing broader market volatility despite earnings heading higher.
Data from YCharts.
The stock’s price-to-sales (P/S) ratio has fallen from more than 20 to just over 11. It’s still not the cheapest stock out there, but Airbnb’s very high free cash flow means a lot. especially in a market looking for profitable companies.
One might suspect that Airbnb will start to feel good once Wall Street gets its head around it and realizes that the company is a cash cow with a long-term growth trajectory. Consider buying this winner now — you can brag about it to your friends down the road.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.
