1 Robinhood Stock That Could Crush the Market in the Long Run

One compelling feature of online brokerage Robinhood Markets' (HOOD 3.73%) user interface is its list of the top-100 stocks among its traders. While this might be a good place to look for ideas, investors shouldn't choose to invest in a company simply because it appears on this list -- or any other list. It takes some further investigation to determine whether or not a company has the potential to be a good investment.

One company on this list that I think is worthy of a second look is Airbnb (ABNB 0.49%). A disruptor in the travel space, Airbnb has had a successful time in the public markets since its initial public offering (IPO) in December of 2020. But it's the potential that has me believing this stock could be a market crusher in the long run.

Navigating the end of the pandemic

The story of Airbnb as a public company has very much been tied to the pandemic. As a result, it's helpful to zoom out from some of the important business metrics to see where the long-term trends are heading. 

The 104 million nights and experiences booked on Airbnb in the second quarter of 2022 was a record, and represented a 25% increase year over year, as well as a 24% increase over the second quarter of 2019.

Looking deeper into these numbers, the company reported that nights booked in high-density urban areas, as well as cross-border travel, surpassed their pre-pandemic levels. And long-term stays (defined as 28 days or more) remained the fastest-growing category, increasing almost 25% year over year and 90% over 2019.

These growth metrics are important for Airbnb. The higher the business can scale, the better its profitability and cash generation will be. This dynamic is starting to show up in the financial statements.

Transitioning to profitability

Strong revenue growth is nothing new for Airbnb, and the most-recent quarter was no exception. In the second quarter, the company generated $2 billion in revenue, up 58% than the year before and 73% higher than 2019. 

What is new, however, is seeing this revenue drop to the bottom line. Net income for the second quarter was $379 million, and while that's only a net income margin of 18%, it's a massive improvement over the last few years. 

Data source: Airbnb.

For an asset-light business like Airbnb, this newfound profitability was to be expected as the company grew. The easiest place to see the move toward profitability is by looking at Airbnb's operating expenses as a percentage of revenue. In the second quarter, total operating expenses were 64% of revenue, down significantly from 82% in the year-ago quarter. 

Some of this is due to increased revenue, but there have been some intentional moves made to cut costs as well. On the earnings call, management pointed out the cost-cutting changes made in 2020, including reducing headcount, that have resulted in a leaner company today. Management remains committed to growth, but also wants to stay focused and disciplined in its investments into the business.

Bottom line for investors

Management sees the positive results from the second quarter carrying forward into the current quarter. In the third quarter, nights and experiences booked are expected to increase approximately 25% year over year, while revenue is expected to reach a new quarterly record of approximately $2.8 billion. This would represent growth of 26%.

This positive outlook has also given management the confidence to institute a $2 billion share repurchase plan. While share repurchases have the potential of increasing shareholder value, Airbnb's shares outstanding have increased by nearly 9% since its IPO. It remains to be seen if these share repurchases will simply offset future dilution due to stock-based compensation, or if they will actually reduce the share count. 

The global vacation rental market was estimated to be $75 billion in 2021. Compare that to Airbnb's results and it's clear how large the market opportunity is for the company. When I consider the size of the market and how the company has grown and become profitable, I think Airbnb could be a market-crushing investment over the long term.