Robinhood Markets (HOOD 0.70%) changed the investing game with its introduction of no-commission trading, and it introduced a whole new generation to the stock market. The average age of a Robinhood account holder is just 31.
Robinhood's outsized influence on the market faded during the current bear market, but it's still a good idea to keep an eye on what Robinhood traders are buying. Their interests offer a good proxy for what the youngest generation of investors is drawn to.
Robinhood maintains a running list of its 100 most widely held stocks, and one stock on that list looks particularly appealing right now. Home-sharing leader Airbnb (ABNB 0.68%) finds itself roughly in the middle of the list. It also looks poised to crush the market in the long run. Let's look at three reasons why.
1. Airbnb's business model is a cash machine
In its earlier years, Airbnb's profitability was inconsistent as the company invested heavily in growth and was less concerned about the bottom line. However, the pandemic forced financial discipline on the company. It laid off a quarter of its staff in May 2020 and shut down unprofitable products. As a result, the company's profitability has soared over the last few quarters as travel demand bounced back in the economic reopening.
In Airbnb's second quarter, the company posted year-over-year revenue growth of 58%, or 73% from Q2 2019, to $2.1 billion, and GAAP net income reached $379 million, equal to a profit margin of 18%. Adjusted EBITDA was even stronger at $711 million, and its free cash flow (FCF) of $795 million translated into an FCF margin of 38%, a level of profitability few companies can match.
Though the summer months tend to be the seasonally strongest for Airbnb, those numbers show how efficient its marketplace-based business model is at turning revenue into profits.
What's also remarkable about this is that the business requires very little capital expenditure. The company spent just $15.4 million on capital expenditure in the first half of the year. In other words, Airbnb's tech infrastructure has reached scale and the home-sharing giant can grow with little investment. That gives it significant fixed-cost leverage, meaning profit margins should continue to expand as revenue grows, all else being equal.
2. Airbnb is gaining share in a huge market
Airbnb hasn't put the hotel industry out of business, but it has changed the industry forever, filling a gap in the market that hotels weren't meeting. Airbnb made things like kitchens and full apartments available for guests for the first time, greatly expanding the market for accommodations. Hotels and online travel agencies like Booking Holdings responded by offering more of these kinds of amenities, but Airbnb remains the leader in the home-sharing market, and, in fact, has more rooms available than any other hotel chain.
At the time of Airbnb's IPO in December 2020, it estimated that its serviceable addressable market (SAM), meaning the market its products currently serve, was $1.5 trillion, while the total addressable market available in lodging and experiences was $3.4 trillion. Those are huge markets, and with just $17 billion in gross booking value in its most recent quarter, Airbnb has plenty of room left to grow if the company can execute on its vision.
3. Airbnb stock is cheap
Unlike most growth stocks, Airbnb is highly profitable and growing quickly at a time when a number of growth stocks are facing a hangover as pandemic tailwinds have faded.
Even though Airbnb's experience was the opposite of most of the tech sector during the pandemic, it's still being punished by market sentiment against pandemic stocks. The stock price is down roughly 50% from its peak late last year, even as its growth has remained strong. For the third quarter, the company projects revenue of $2.78 billion to $2.88 billion, or an increase of 24% to 29% from third-quarter 2021, while it expects adjusted EBITDA of roughly $1.4 billion.
Airbnb didn't give guidance for the full year, but analysts expect $2.17 in earnings per share, meaning its price-to-earnings ratio is just 48, and even lower on a free cash flow basis. While the company's top-line growth rate will moderate as the travel recovery plays out, that still seems too cheap for a stock with Airbnb's historically strong growth rate, huge market opportunity, and demonstrated profitability.
