It's a new year and investors are looking ahead to the coronavirus recovery.
Stocks that were hit hard last year have already started bouncing higher this year, including those in banking and energy, as investors anticipate another stimulus package from the incoming Biden administration.
Airline stocks were crushed last year: All of the four major airlines except Southwest Airlines (LUV -1.49%) lost more than 30%. With Delta Air Lines (DAL -0.18%) set to kick off earnings season on Thursday, investor attention is turning to the sector again. While air passenger traffic increased in the fourth quarter according to the TSA, especially around the holidays, it was still down by more than 50% for the period, and airlines are likely to face stiff headwinds at least through the current quarter as COVID-19 cases are near their peaks in the U.S.
Additionally, airlines have high fixed costs, and all four of the major carriers, which also include American Airlines Group (AAL -0.83%) and United Airlines Holdings (UAL -0.94%), have seen their debt burdens grow significantly during the pandemic, meaning they will face headwinds from increased interest payments even after the crisis ends. There are real questions whether business travel, a key source of demand, will return now that remote work options like Zoom Video Communications have proven to be viable.
For investors looking to airlines for a piece of the recovery economy, there are some better options elsewhere in the travel sector. Keep reading to see why Airbnb (ABNB 5.68%), TripAdvisor (TRIP 0.60%), and Trivago (TRVG 0.00%) fit the bill.
Airbnb's competitive advantages are manifest. The company is by far the biggest vacation rental website, an industry that it pioneered and with which its name is synonymous. The company has weathered the pandemic better than most online travel agencies as its business gives it a level of flexibility that hotel platforms don't have. Though bookings are still down significantly at Airbnb, it has outperformed online travel agencies (OTAs) like Booking Holdings because of its ability to cater to shifting demand for things like long-term stays and short-distance travel outside of cities. The company also laid off about 25% of its workforce, which will greatly improve its cost structure and bottom line when the underlying business recovers.
Airbnb has less exposure to business travel than hotels and airlines do, making it better positioned for a surge in vacation demand, which is likely to come once it's safe to travel again. Additionally, the company has rooms all around the world and at a wide range of price points, giving travelers a multitude of options. While the stock may look expensive following its post-IPO run, a post-pandemic resurgence would almost certainly push the stock higher and strengthen its competitive advantages in the travel industry.
The recovery in TripAdvisor shares has already begun as the stock is up 75% since Pfizer and BioNTech announced successful phase 3 vaccine trials in November, but that doesn't mean it's too late to hop on the bandwagon. As a travel-related advertising business, TripAdvisor may have more upside than any other travel stock as advertising demand is especially sensitive. Shares plunged as the pandemic hit, but the company is likely to see strong demand from hotels, restaurants, experiences, and other travel-related businesses once tourism picks up again.
Unlike businesses like airlines, TripAdvisor's fixed costs are low as most of its expenses come from its employees and sales and marketing to drive traffic to its site. Like Airbnb, TripAdvisor laid off about a quarter of its staff in the spring, which should help pad its bottom line when the pandemic ends.
The company also said in its last earnings call that it was planning to roll out a direct-to-consumer subscription service, dubbed TripAdvisor Plus, that will offer consumers discounts on hotels and travel attractions. That could be a catalyst for the company's recovery, especially as travel demand is poised to spike. Meanwhile, hotels, restaurants and other travel destinations will be eager to get customers back in their doors and will look to platforms like TripAdvisor to drive that traffic.
Hotel metasearch platform Trivago has seen demand dive during the pandemic, but the company has handled the challenges adeptly, scaling back on marketing costs, shuttering regional offices, laying off staff to save costs, and rolling out new features like local search and discovery to help travelers find a destination when they don't know where they want to go.
As a result of those efforts, the company managed to report positive adjusted EBITDA in the third quarter even though revenue fell 76%. The company relies on search traffic from Booking and Expedia Group, but demand from the leading OTAs should bounce back once the pandemic ends, and Google, which has been a threat to Trivago and the broader travel industry, may have been chastened by recent antitrust investigations.
The stock has recouped most of its 2020 losses, but it still looks cheap, trading at a price-to-sales ratio of less than one based on 2019 revenue. Like TripAdvisor, Trivago's fixed costs are minimal, and it can easily flex advertising up and down according to demand, which should help the company make a quick recovery when the pandemic fades.