The stock market has been volatile this year. While the S&P 500 is down 14%, the tech-heavy Nasdaq Composite index is down more than 23% this year alone, and it has been a rough and bumpy ride down.
With so much volatility and uncertainty, it can feel like the worst time to buy stocks is right now. But, in reality, this is the best buying opportunity because of deeply discounted stocks available in the market. Two companies trading at a steep discount right now are PubMatic (PUBM 0.28%) and Airbnb (ABNB 0.68%). With bright futures and sturdy financials, they are begging to be bought.
Image source: Getty Images.
1. PubMatic
Tech behemoths like Alphabet and Meta Platforms have ruled the advertising industry, but some companies are disrupting this space. Advertising technology (adtech) companies allow businesses to optimize their digital ad campaigns easily. PubMatic is one of these companies, helping publishers get the best bang for their buck on their open ad space.
PubMatic is not the largest adtech company working to help publishers, but it is one of the top dogs. In terms of revenue, Magnite is roughly double the size of PubMatic, but the latter is quickly catching up. Almost all of Magnite's expansion comes from swallowing smaller companies rather than organic adoption of its products. This signals that Magnite's services might be subpar, and to achieve growth, it has to acquire other businesses. PubMatic, on the other hand, is growing organically much faster than Magnite, potentially meaning that its product is much more attractive than Magnite's. In Q1 2022, PubMatic expanded its top line by 25% year over year, but Magnite's organic growth for the quarter was just 15% over the same period.
The company believes it has just 3% to 4% of the total digital advertising market, so if it continues to see higher organic adoption by publishers, PubMatic could explode higher from here.
PubMatic is gushing cash, which is useful over the long term. In Q1, the company generated $15 million in free cash flow, which trumps Magnite's burn of $9.7 million over the same period. PubMatic is clearly more effective at turning revenue into cash, which it can reinvest this back into the business and help it out-innovate Magnite now and in the future.
Most investors left tech stocks for dead this year because of previous expensive valuations, but PubMatic trades at just 20 times earnings. Magnite, on the other hand, traded at a staggering 897 times earnings in January before its trailing-twelve-month earnings turned negative again, making PubMatic the obvious bargain and the company that could be more resilient during an economic downturn. PubMatic has a profit margin of nearly 24%, whereas Magnite's profit margin is currently a negative 6%, signaling that the former could sustain an economic downturn while Magnite could be left out to dry. If PubMatic can continue to generate sustainable free cash flow to fuel adoption for the long term, it could overtake Magnite as the leader. If that happens, patient investors could be rewarded if they bought the stock at these low prices.
Image source: Getty Images.
2. Airbnb
Airbnb also trades at a discounted price today. It trades at 28 times free cash flow, which is 84% lower than its valuation one year ago. People are traveling more because they haven't been able to for the past few years, resulting in Airbnb having its most active quarter on record. Vacationers booked 102 million nights and experiences on the platform in Q1, which grew 59% year over year.
One of the competitive advantages Airbnb has is its brand reputation for uniqueness. It features unique stays in treehouses, caves, and off-the-grid locations, rather than a simple hotel room. Importantly, Airbnb has more than 6 million active listings, so the uniqueness is unlikely to run out.
While it might have an advantage over competitors in attracting new users, the company has struggled with keeping users there. Poor hosts and surprise fees have left a bad taste in consumers' mouths, but Airbnb is working to fix this.
Airbnb announced AirCover for guests in 2022, which is always free and included for every guest. AirCover includes booking protection, a check-in guarantee, and a get-what-you-booked guarantee, ensuring that consumers will be satisfied with their stay or get their money back. AirCover also includes a 24-hour safety line for guests if they feel unsafe.
A recession or economic downturn that causes consumers to spend less money on discretionary things like travel could put short-term pressure on the company. That said, this might not impact the long-term thesis. In Q1, Airbnb generated nearly $2.9 billion in free cash flow over the trailing 12 months and has over $9.3 billion in cash and securities on the balance sheet, so not only could it stay afloat during a downturn, but it could also invest more heavily than competitors to come out of a depressed economic period stronger.
With its brand remaining strong and the company investing in creating a better platform for repeated usage, I think that Airbnb looks like a great investment for the long term. The immense free cash flow can help it continue creating a better consumer experience, which will only sustain its impressive growth from here. At these prices, this is a great company at a cheap valuation, and I think investors should take advantage of it.
