If you're an investor, the market has probably been testing your mettle lately. The S&P 500 index has tumbled roughly 16% from its peak level. Meanwhile, the Nasdaq Composite index has slumped a staggering 29% from its peak. With major indexes down big in the face of macroeconomic pressures, many quality stocks have seen even more precipitous valuation pullbacks.
But despite the pressures and uncertainty shaping market action right now, long-term investors have an opportunity to build positions in some fantastic companies that will likely recover and eventually post strong share price gains. Read on to see why two Motley Fool contributors identified these two companies with beaten-down valuations as top buys on the heels of recent market turbulence.
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Airbnb is poised to be a big winner for patient shareholders
Keith Noonan: Airbnb (ABNB 1.03%) is one of my largest portfolio holdings by weight, and I plan to treat the big pullback in the stock as an opportunity to add to my position in the near future. While the stock has fallen roughly 52% from its peak, I've been highly impressed with the company and its execution, and I think there's a very good chance that shares purchased at today's prices will deliver multibagger returns for long-term investors.
Like many other companies with growth-dependent valuations, Airbnb saw substantial multiple contraction due to pressures including inflation, rising interest rates, and the potential for a prolonged economic downturn in 2023. After growing revenue about 29% year over year in last year's third quarter, management's midpoint guidance for growth of 20% in Q4 does point to meaningful deceleration, and the leadership team's comments generally indicate that the company is anticipating a more challenging economic backdrop this year.
On the other hand, Airbnb's business actually looks to be in great shape, and the company's valuation isn't as concerningly growth dependent as it might look upon first glance. While the short-term rental specialist trades at roughly 7 times expected forward sales and roughly 33 times expected forward earnings, the company is actually valued at roughly 20 times trailing-12-month free cash flow.
On revenue of roughly $8 billion over the trailing period, Airbnb managed to rack up roughly $3.3 billion in free cash flow -- good for a 41% margin. That's a highly impressive performance for a company that's also expanding sales at a relatively strong clip and still has so much room for long-term growth.
Airbnb is a category-leading business with impressive margins, a great management team, and a stock trading at levels that leave room for potentially explosive long-term upside. I'm excited to see what the company does next and expect that patient shareholders will see very strong returns.
Disney is down but not out
Parkev Tatevosian: Down 48% off its recent high, Walt Disney (DIS -0.55%) could be an excellent stock to buy right now. The House of Mouse has been delighting families for decades with wholesome entertainment.
Admittedly, it has not fully recovered from the devastation of the pandemic, and efforts to expand its streaming business are proving expensive. Still, that short-term pain creates this opportunity to buy Disney's stock at a lower price.
Even including the pandemic shutdowns, Disney's revenue expanded by a compounded annual rate of 6.9% in the previous decade. Consumers are unleashing pent-up demand for away-from-home experiences, which bodes well for Disney's near-term prospects.
Moreover, upgrades to the theme park business during shutdowns, including mobile ordering at restaurants, a digital reservation system, and premium features like paying for skipping lines, made the segment more profitable than ever.
DIS PE Ratio (Forward) data by YCharts
Disney's most recent blockbuster title, Avatar: The Way of Water, surpassed $2 billion in box office sales, proving yet again Disney's dominance of movie theaters.
The headwinds to profitability and fears of how its business will fare should the U.S. economy enter a recession has Disney's stock trading at a forward price-to-earnings ratio of about 25. In my opinion, this is a bargain price for a business with strong consumer tailwinds.
Long-term investors can win with top stocks
Market conditions have been tough for growth stocks, but the good news is that the hard times won't last forever. Strong companies will be able to weather economic pressures and eventually emerge from the mire to enjoy much more favorable operating and valuation conditions.
With their share prices down big, investors who take buy-and-hold approaches to Airbnb and Disney could wind up reaping the rewards of stellar long-term returns.
