The rising-interest-rate environment has proven quite challenging for the U.S. equity market, especially for growth stocks. Share prices of many companies have tanked dramatically in the past year despite solid financials and robust business models.
Airbnb (ABNB 0.10%) and Snowflake (SNOW -1.61%) are two such companies that have continued to post solid numbers, yet their share prices are currently trading at a deep discount to their historical valuations. Here's why these two companies can prove to be smart long-term buys for investors in the current times.
1. Airbnb
Leading short-term rental platform Airbnb has established a dominant presence in the travel industry mainly due to its focus on providing quality accommodations across price ranges and property types. The company's platform acts as a marketplace for those who want to rent their properties (hosts) and those seeking out rental properties (guests). Currently, there are around 4 million hosts with 6 million listings on the Airbnb platform who have welcomed over 1 billion guests across the world.
Unlike conventional hotels, Airbnb can rapidly respond to changes in demand by adding supply with minimal capital. By investing in building a solid host community, the company continues to add high-quality properties to its network at a rapid pace. The company is also benefiting from network effects since satisfied hosts continue to attract even more hosts to the platform.
While Airbnb previously targeted mostly vacation rentals, the company has focused on expanding its addressable market by concentrating on long-term stays of people involved in remote or hybrid work, subletting apartments properties, accommodation in non-urban areas, as well as on offering unique experiences (cooking, sporting, etc.) to guests.
The efforts have been bearing fruit, as evident from the stellar financial results in the third quarter (ended Sept. 30, 2022). Revenue rose 29% year over year to $2.9 billion while net income surged 46% to $1.2 billion. The company had $9.6 billion cash on its balance sheet at the end of the third quarter, while total debt was only $2.4 billion. Airbnb generated $960 million in free cash flow, further highlighting the business's strong cash generation potential.
Airbnb is currently trading at around 43 times earnings, which is just a little bit higher than its historically low valuation. Combined with its diversified business model and robust balance sheet, Airbnb can prove to be an attractive pick now.
2. Snowflake
Enterprise software company Snowflake's cloud-based platform enables organizations to integrate data across data vendors in a centralized location and share it with their partners in an efficient and secure manner. The company also enables businesses to visualize the data and derive insights for making data-driven decisions by leveraging artificial intelligence and machine learning capabilities. These functions help reduce unnecessary data duplication while also improving the tracking of any changes in data.
Snowflake's target addressable market is expected to be worth $248 billion by 2026. The company seems poised to capture a significant share in this market thanks to a rapidly expanding partner ecosystem, multiple big clients across industry verticals, and interoperability of the company's platform across a range of cloud players such as Amazon's AWS, Microsoft's Azure, and Alphabet's Google Cloud. Snowflake's usage-based business model, which enables organizations to pay only for those services they are using, can also help reduce customer churn during economic slowdowns.
Snowflake's business strength is apparent in its recent financial performance. The company's revenue soared by 67% year over year to $557 million, and non-GAAP (adjusted) earnings per share (EPS) more than tripled year over year to $0.11 in the third quarter of fiscal 2023 (ended Oct. 31, 2022). Revenue and non-GAAP EPS were ahead of the consensus estimates by $18 million and six cents, respectively.
Snowflake boasts of a dollar-based net revenue retention rate of over 150% for the past five quarters, highlighting its platform's sticky nature and the increasing success of its cross-selling activities. The company also generated a free cash flow of $65 million in the third quarter, which is considered to be a solid result in times of economic uncertainties.
A recession in 2023 would likely cause Snowflake to lose a few customers, which can prove challenging since the company is unprofitable on a generally accepted accounting principles (GAAP) basis. However, Snowflake is currently trading at 25.5 times sales, which is at the lower end of its historical valuation and seems to be accounting for the potential business slowdown.
Hence, despite the risks, considering the company's strength in the rapidly expanding data cloud market, free-cash-flow generation, and its relatively corrected valuation, Snowflake seems to be a good buy now.
