With inflation running hot, the Federal Reserve hiking interest rate to get the situation under control, and concerns that 2023 will suffer an economic downturn, growth stocks have been under pressure lately.
Despite strong business performance, rental specialist Airbnb's (ABNB 1.09%) share price has tumbled about 52% from its high. Meanwhile, e-commerce player Wayfair (W -0.02%) has seen an even bigger valuation pullback. Its stock is down a dizzying 84% from its peak.
Which of these stocks is better positioned to bounce back and post big gains for long-term shareholders? Read on to see why two Motley Fool contributors have differing takes on which stock is more likely to deliver great returns for investors.
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Airbnb is a great company trading at a great price
Keith Noonan: Along most key business metrics, Airbnb has been serving up a stellar performance over the past year. Obviously, the stock performance has been another matter, but that's largely due to the challenging macroeconomic backdrop. And it bears repeating just how strong of a year 2022 was for the company.
With the lessening of pandemic-related headwinds, Airbnb proved that it could deliver highly profitable growth. Aided by a 29% year-over-year jump in sales in the third quarter and an 86% gross margin, the rental specialist's net income jumped 46% year over year to hit $1.2 billion in Q3. Meanwhile, free cash flow (FCF) surged more than 80% to reach $960 million, bringing the company's trailing-12-month FCF total to $3.3 billion.
With Airbnb's market capitalization pushed down to roughly $66 billion following recent sell-offs, the company is valued at approximately 20 times trailing FCF -- a level that leaves room for long-term investors to bank potentially incredible returns with the stock. The company's flexible, asset-light business model is putting up great results, and the 41% trailing FCF margin that the business has posted looks downright incredible, considering that Airbnb is still very much in growth mode.
Granted, the company is anticipating some growth deceleration in the face of a more challenging macroeconomic backdrop. But midpoint guidance for sales growth of roughly 20% in last year's Q4 and the likelihood that 2023's sales-expansion rate will lag last year's performance are hardly deal breakers as far as I'm concerned.
Like most companies, Airbnb will see performance ebb and flow in conjunction with macrotrends, but I have a high level of conviction that the stock will deliver wins for long-term shareholders.
Wayfair could offer long-term gain for short-term pain
Parkev Tatevosian: If you're going to have a furniture business, it's best to have it online. Renting or owning enough floor space to display oversized, bulky items is expensive. That's precisely what Wayfair has built -- an online furniture business that has grown sales from $601 million in 2012 to $13.7 billion in 2021.
The company highlighted its potential during the first year of the pandemic in 2020. That year, Wayfair grew sales by 55% to $14.1 billion, and generated an operating income of $360 million and earnings per share of $1.86. It was the only year in the last decade when it was profitable on the bottom line, and it proved to investors that this business model could deliver profits in the right circumstances.
W PS Ratio data by YCharts
Admittedly, the near term is a challenging one for Wayfair. Consumers are unleashing pent-up demand for away-from-home experiences, spending less money on home goods. Furthermore, inflation is pinching budgets, leaving less disposable income for those who want to update their home decor. However, most of the headwinds could already be priced into Wayfair's stock. Investors can buy shares of Wayfair at a price-to-sales ratio of less than 0.5, near the lowest it has traded for in the last several years.
Which stock should you buy?
For starters, investors should consider whether they would prefer to have exposure to the travel rental industry or the e-commerce industry. Wayfair has seen an even bigger valuation pullback than Airbnb and may have more room for explosive recovery, but its near-term growth outlook may be more fraught.
On the other hand, Airbnb has been posting strong business results over the last year, but the company is facing macroeconomic headwinds, and its much larger market cap suggests it may have more downside risk or a harder path to explosive gains. Each company offers both opportunity and challenges today.
