Peter Lynch is an incredibly successful investor. From 1977 to 1990, Lynch led Fidelity's Magellan Fund, generating an average annual return of 29.2%, more than double the return of the S&P 500 during that time.
Lynch, who is also known for his books One Up on Wall Street and Beating The Street, argued that individual investors should buy what they know, and that some of the best investing ideas can be found in the supermarket or through conversations with friends. He started with such observations before doing fundamental analysis, in order to make sure the story made sense.
Additionally, he's credited with inventing the PEG ratio, which measures the price-to-earnings ratio in relation to earnings growth.
If Lynch were still active, it's a good bet that he would be a big fan of Airbnb (ABNB 1.55%), as it has many of the qualities he looks for in a stock.
Image source: Airbnb.
A great story
Airbnb has both a compelling business model and a compelling story. Through its early days, the company grew almost entirely through word of mouth, as the concept sells itself.
The home-sharing platform offers a way for homeowners and renters to make money from their own homes, either by renting out a spare room on a short-term basis or renting out the place when the host is away.
For travelers, it also opened up new destinations and created a unique way to travel, where you can get tips from locals rather than a guidebook or a hotel concierge. Airbnb also offers travelers the ability to stay in places where there aren't hotels, such as rural destinations or residential neighborhoods in cities.
The success of the platform speaks for itself. Airbnb now has more than 4 million active hosts on its platform, with more than 6 million listings. Over its history, it's facilitated more than 1 billion guest arrivals.
Airbnb's brand, along with the network effects and switching costs inherent in the model, have also made it the clear leader in home-sharing, well ahead of competitors like Expedia's VRBO and Vacasa.
NASDAQ: ABNB
Key Data Points
A good value
Airbnb's stock also offers an excellent price at the moment, especially based on Lynch's favorite metric, the PEG ratio.
The stock currently trades at a price-to-earnings ratio of 41, double the S&P 500's P/E ratio, but still looks like a good value given Airbnb's growth rate. In its most recent quarter, revenue jumped 29% to $2.9 billion, and net income rose 46% to $1.2 billion, showcasing the company's strong margins.
Analysts expect the company's growth rate to slow as it starts to run into more difficult comparisons and as recessionary headwinds are expected to slow down the travel sector. Over the next three years, however, the company is still expected to grow earnings per share by 21% a year, meaning its PEG ratio would be slightly lower than 2. For a company growing as fast as Airbnb, that seems like a pretty good valuation.
However, Airbnb has easily beat analyst estimates over the last four quarters, so the forward estimates could prove to be low as well.
The company has also been investing in share buybacks, another favorite tactic of Lynch's, lowering its shares outstanding and increasing earnings per share.
Altogether, Airbnb offers a compelling growth story from a market leader in an industry it created. Better yet, the stock is highly profitable and trades at a reasonable valuation, especially for a company with its expected growth rate.
If Lynch were still running the Magellan fund, he'd likely hit the buy button on Airbnb today.
