Stock indices have recently reached new all-time highs. A resilient economy, interest rates that should fall, enthusiasm for an expected business-friendly new government, enthusiasm for artificial intelligence (AI) and high-flying tech stocks like Nvidia And Microsoft all play a role in this bull market.
Investors should exercise some caution at these levels. Remember, the euphoria of 2021 quickly turned to fear in 2022. There are parts of the market that now look like 2021. For example, Palantir‘s shares trade for 56 times sales and more than 160 times forward earnings. It’s a great company, but this is a nosebleed rating anyway.
Start your morning smarter! Wake up with Breakfast news in your inbox every market day. Register for free »
However, some companies are still trading at reasonable valuations with positive long-term trends. Here’s one to consider.
Holiday habits change. Younger generations are booking vacation rentals at a higher rate than older generations, who stick more to traditional hotels. As shown below, the number of holiday home users will increase by 25% between 2024 and 2029.
The trend means that Airbnb (NASDAQ:ABNB) has a long tailwind. Airbnb is now also very successful.
Revenue reached $3.7 billion last quarter on 10% year-over-year growth, and operating income reached $1.4 billion on fantastic 37% growth. What I like most about the company, however, is its ability to generate free cash flow. Airbnb operates with a streamlined business model and does not have significant capital expenditures (capex), putting a large portion of revenue back into the company’s own pockets. Of $10.8 billion in revenue over the last twelve months, $4.1 billion was converted into free cash flow, a whopping 38% margin.
Airbnb’s massive free cash flow allows it to finance growth, maintain its balance sheet and buy back shares. As of the third quarter, the company reported $11.3 billion in cash and investments, versus just $2 billion in long-term debt. The company also repurchased $2.6 billion worth of stock over three quarters of 2024, representing over 3% of the company’s current market capitalization.
Airbnb shares trade at a similar valuation to their rival Bookings of holding companies (NASDAQ: BKNG) based on free cash flow, as shown below.
This makes sense as the business models and financial results are similar. It also shows the importance of free cash flow in valuing these companies. Airbnb is trading slightly below recent averages and well below recent peaks.
Both are great investment options; However, Airbnb’s market capitalization is about half that of Booking, so there is more room to grow.
The biggest risk for Airbnb is regulation. Many municipalities and homeowners associations have rules that restrict short-term rentals. Airbnb proactively works with policymakers to create mutually beneficial regulations to mitigate risk.
Airbnb will benefit from the long-term trend towards vacation rentals. The rapid increase in the number of users and the excellent financial results make the stock an excellent choice for the long term.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
-
Nvidia: If you had invested $1,000 when we doubled in 2009, you would have $368,053!*
-
Apple: If you had invested $1,000 when we doubled in 2008, you would have $43,533!*
-
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $484,170!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns November 18, 2024
Bradley Guichard has positions in Airbnb and Booking Holdings. The Motley Fool holds positions in and recommends Airbnb, Booking Holdings, Microsoft, Nvidia and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
1 Brilliant Growth Stocks to Buy Now and Hold for the Long Term was originally published by The Motley Fool
