Today's bear market began in late 2021 when the Federal Reserve started hinting it would be raising interest rates to combat the threat of rising inflation. Rising interest rates are bad news for stocks because they decrease the present value of future cash flows. Additionally, when interest rates are higher, it increases the opportunity cost of capital.
Nevertheless, bear markets are bad news for nearly everyone, except those who bet on a falling market. Still, a bear market can be an excellent time to add beaten-down but quality stocks to your portfolio. One particularly outstanding stock to buy now is Airbnb (ABNB 1.17%). Here's why the worldwide travel facilitator deserves a spot in your portfolio.
Airbnb is ahead of the travel rebound
The company is recovering exceptionally well after the outbreak of COVID-19 caused its revenue to fall by 30% in 2020. In the following year, Airbnb's sales surged by 77%. Airbnb acts as a middleman, connecting those looking to travel with those with a place they would like to rent. This asset-light business model gives Airbnb the flexibility to expand and contract along with the rise and fall in consumer demand.
When travel demand is soaring, as it is now, Airbnb can expand the supply of places to rent by encouraging more hosts to sign up and list more often. Some of that encouragement is done on its behalf. When hosts observe surging customer demand, they will want to list more places more often because of the potential income.
Moreover, this hands-off approach alleviates another major problem -- labor shortages. Hosts act as employees for Airbnb, ensuring guests get access to the property and providing any information they might need.
ABNB Cash from Operations (Quarterly) data by YCharts
The business model has worked well to boost Airbnb's cash flows, as revenue has rebounded dramatically. Unlike rival hotel and resort businesses, Airbnb does not need to invest large sums to build and maintain properties. In its most recent quarter, which ended in March, cash flow from operations increased to $1.2 billion. That was almost double the $618 million in cash flow from operations it generated in the same quarter of the prior year.
Airbnb is achieving all this success, and worldwide travel demand has yet to recover entirely. At the pandemic's onset, spending on hotels and resorts cratered, falling to $610 billion in 2020, down from $1.5 trillion in 2019. In 2021, it had only recovered to $950 billion. That leaves over $500 billion in spending before it reaches pre-pandemic levels. However, since many folks have delayed vacations for years, the unleashing of pent-up demand will likely push spending higher than pre-pandemic levels in the coming years.
Airbnb's stock is inexpensive
ABNB Price to Free Cash Flow data by YChart
Displaying one of the benefits of a bear market, Airbnb stock is trading at a price-to-free-cash-flow mutliple of 25, near its lowest in the last three years. With rising prospects, investors can buy this excellent business at a bargain price.
