The Nasdaq Composite (NASDAQINDEX: ^IXIC) had a roller-coaster ride over the last few weeks. After hitting a record high in February, the index dropped 11% to enter a correction phase on Monday. It quickly recouped some of the losses and has since exited the correction phase -- at least for now.
Still, holding on to high-flying (and somewhat volatile) stocks is getting painful these days. Even Snowflake and Palantir Technologies -- two of 2020's hottest stocks -- are still down in price by over 40%. So are we headed for a market crash? Unless you have a working crystal ball, there's no way to tell. While bubbles and market crashes are often obvious in hindsight, predicting them is quite tricky.
Perhaps a better question is: Which stocks will you buy when the next market crash puts all of them on sale? As for me, I already have my eyes set on two companies, Square (SQ 0.78%) and Airbnb (ABNB 0.19%). Here's why.
Image source: Getty Images.
1. Square is executing amid the pandemic
Thanks to the pandemic-fueled recession, 2020 will go down in history as a terrible year for corporate America. But that didn't stop Square -- a fintech serving small businesses and consumers -- from delivering a solid set of financial results for the year.
In 2020, Square's gross profits rose 45% to $2.7 billion. Net revenue surged 101% to $9.5 billion, driven mainly by a jump in Bitcoin trading fees. But even if you were to strip out Bitcoin-related revenue, Square's revenue rose 17% year over year.
At first, glance, that 17% looks paltry -- especially when you consider that Shopify's revenue soared 86% in 2020. But consider this. Square's main customers are small business owners operating brick-and-mortar stores. These retailers had a horrible year thanks to COVID-19 lockdowns, with thousands shutting down for good. Yet Square still delivered growth, a testament to the resilience of its business model.
Square has come a long way from its roots as a payments provider for small businesses. Initially, it grew by expanding its merchant services, ranging from card readers to a lending platform. It has since entered the consumer business with Cash App -- a bet that did extraordinarily well during the pandemic. Cash App, which allows users to transfer cash using their smartphones, saw revenue jump 440% to $6 billion in 2020.
Building on an already large user base of 36 million active customers, Cash App is Square's next growth engine. That is why Square is rolling out new services to make Cash App stickier than ever. That includes stock trading, Bitcoin trading, and more recently, the Cash Card. Soon, Square's customers will get access to banking services such as loan and deposit products. All this makes Cash App even more appealing -- not just to existing customers, but also to potential new ones.
With plenty of levers to drive growth, Square is reaching for the stars. Perhaps that explains its sky-high valuation of roughly 600 times trailing-12-month earnings. Square is a great company, but its current stock price is just too expensive. If the stock becomes cheaper during a downturn, I will definitely be a buyer.
2. Airbnb, the comeback king
The COVID-19 pandemic was a disaster for the travel industry. Shares of Booking Holdings and Expedia Group plunged over 50% in value by March 2020, while airlines needed a $50 billion government bailout just to survive.
Life was equally tough for Airbnb. Bookings fell 72% year over year in April. To reflect the impact of the pandemic, Airbnb was forced to slash its valuation to $26 billion from $31 billion, according to a Reuters report.
But since then, Airbnb has staged a stunning comeback. Domestic reservations are up as people start to combine work-from-home and travel, leading to longer stays. Lockdowns are also gradually easing, although international travel is still restricted.
There's much to suggest the worst is over for Airbnb. In its first earnings report since its December 2020 IPO, Airbnb revealed a 22% year-over-year drop in revenue to $859 million. That was a huge improvement compared to the 72% drop in revenue Airbnb suffered in the second quarter of 2020. Moreover, Airbnb ended 2020 with $6.4 billion in cash, restricted cash, and marketable securities. To put things into perspective, Airbnb spent $630 million to run its business in 2020. Its sizable buffer will be useful against any further shocks.
So what's next for Airbnb? In the near term, the vaccine rollout could spark a recovery in global travel. As more people start traveling -- first domestically and then internationally -- Airbnb will get a boost. Beyond that, new use cases -- such as the shift to remote work -- could help Airbnb capture a larger share of its $3.4 trillion addressable markets. For context, Airbnb's $23.9 billion in gross booking value for 2020 is less than 1% of this opportunity.
Still, despite the recent correction in tech stocks, Airbnb is still up 165% from its IPO price of $68 a share. At $188 a share, Airbnb trades at 33 times 2020 revenue -- whopping when you consider rival Expedia trades at less than five times revenue. Like Square, Airbnb has explosive growth potential. But as with Square, all this excitement doesn't come cheap. Hence, it's best to wait for more palatable valuations before piling in. A market crash could create just that opportunity.
