The ongoing market downturn is an excellent opportunity to look for the beaten-down names that could be big winners during the next bull market.
Travel can be a great place to start -- an industry survey among travel agents pointed to optimism that travel and tourism will rebound to pre-pandemic levels next year.
Airbnb (ABNB 0.10%) went public in late 2020, just months before many growth stocks peaked. After surging from its $68 IPO price to over $200 per share, the stock has since slumped, but buying Airbnb now could make you look like a genius later.
The company's a cash cow
Airbnb offers a platform that lets homeowners ("hosts," in the company's parlance) rent out their homes and other properties or offer experiences to travelers. Users can book a place to stay from a listing on Airbnb's app or website. The company's reach is worldwide with more than six million listings in 220 countries. A whopping 150 million people use Airbnb.
When you think of travel, you might think of airlines, hotel chains, or cruise lines. But most of these businesses are price competitive and require constant investments. For example, airlines must acquire and maintain a fleet of aircraft, while travelers only care about getting the lowest ticket price.
Airbnb is more like a technology business than a traditional travel company. It doesn't own many hard assets like planes, buildings, or ships and is producing a ton of cash profits as a result.
Airbnb has generated $2.9 billion in free cash flow over the past four quarters, including $795 million in the second quarter. The company generated $0.38 of free cash flow from each dollar of revenue last quarter -- a stellar free-cash-flow margin. Additionally, management announced a $2 billion share repurchase program, a result of generating more cash than it needs to continue growing the business organically.
The travel recovery is already in motion
Airbnb has also roared back from COVID-19 when authorities virtually shut down travel to keep the virus from spreading. The company's second-quarter results showed nights and experiences booked hit an all-time high of 103.7 million for the quarter, exceeding 100 million for the second time.
Booking volume (the total value of all its bookings) totaled $17 billion with revenue of $2.1 billion, up 27% and 58% year over year, respectively. Both metrics surpassed pre-pandemic levels.
Now recovered from COVID-19, growth could slow moving forward if the economy softens enough to put a damper on travel. However, that doesn't mean gas is running dry in Airbnb's growth tank.
Remember that 150 million people sounds like a lot, but Airbnb is a worldwide business with listings in more than 100,000 cities. The global population is nearly eight billion, leaving plenty of room for long-term growth. Airbnb has become a category-defining word, just like Kleenex is for facial tissues. The company faces competition from hotels and other travel websites, but the company has amassed substantial brand power as a pioneer in the industry.
The stock is attractively valued
I like a good treasure hunt; sometimes, X marks the spot. You can see in the chart below that investors have sold off the stock in fear of the broader market's volatility, despite revenue heading higher.
Data by YCharts.
The stock's price-to-sales ratio (P/S) has fallen from more than 20 to just over 11. It's still not the cheapest stock out there, but Airbnb's very high free cash flow means a lot, especially in a market searching for profitable companies.
One might suspect Airbnb will begin to garner bullish sentiment once Wall Street gets its head on straight and realizes the company is a cash cow with a long-term growth runway. Consider buying this winner now -- you might be bragging about it to your friends down the road.
