These 3 Stocks Have Plenty of Room to Run

As of this writing, the S&P 500 is 14% below its all-time high. Nobody likes losing money, myself included. And periods like now can have a sobering effect on investors, motivating more selectivity and scrutiny when picking individual stocks.

For this reason, coming up with a list of three stocks is much harder for me now than when the bull market was raging a couple of years ago. But hopefully this leads to better long-term investment ideas. In this article, I'll share why I believe there's long-term upside for short-term rental platform Airbnb (ABNB -0.41%), apparel retailer Boot Barn (BOOT 4.21%), and software company UiPath (PATH 1.57%).

1. Airbnb

Since Airbnb went public in late 2020, I've liked almost everything about the business except for its valuation. Today, I still like the business. But its valuation in 2023 has been its most attractive so far, increasing its chances of running higher from here.

Airbnb's detractors continue to believe that there's an oversupply of short-term rental properties on the platform and that consumers are leaving it in favor of hotels and bookings through rival platforms. But the company reported its latest quarterly results on May 9, and the numbers continue to contradict the bearish narrative.

In the first quarter of 2023, supply on Airbnb increased 18% year over year. But the average daily rate held steady at $168. If there were an oversupply of properties or if consumers were quitting Airbnb, you'd expect the average daily rate to drop. By contrast, supply growth on Airbnb appears to be matching consumer demand step for step. 

As long as Airbnb's business is stable and growing, it has a remarkable opportunity to generate free cash flow (FCF). The company's trailing-12-month FCF is $3.8 billion, which is a head-turning FCF margin of 44%.

With a market capitalization of $72 billion as of this writing, Airbnb stock now trades at less than 19 times its trailing FCF. That's an attractive valuation for a company still growing at a double-digit pace.

2. Boot Barn

Shares of Western-style apparel retailer Boot Barn are up more than 200% during the last five years. But trading at just 13 times its trailing-12-month earnings, this stock has a valuation that is still cheap. And it has more room to run, provided it can grow its earnings.

I believe it can. Here's why.

Boot Barn's growing popularity isn't a recent fad but rather a long-term trend. Same-store sales -- sales at stores open for at least 13 months -- have increased in nine of the past 10 years. Results for its entire fiscal 2023 will be reported on May 17. But so far, same-store sales are up for fiscal 2023 as well, which would make it 10 out of 11 years, which confirms a longer-term trend at work.

What fascinates me about Boot Barn is its portfolio of exclusive brands. Over the past 12 months, over 32% of the company's sales have come from its own brands, up from just 3% in its fiscal 2012.

The portfolio of these brands is great for Boot Barn for two reasons. First, it can keep customers coming back to stores since they can't find these items elsewhere. But more importantly, Boot Barn's brands have a much higher gross profit margin than the third-party brands that it also sells. In other words, profits are soaring with the growth of its own brands.

Profits can keep soaring for Boot Barn if sales of exclusive brands can continue to increase. And sales growth can be driven by management's ambitious plans. It intends to open more than 500 new locations over the next decade, which would nearly triple the size of the company. This could send sales and profits flying, which I'm sure would allow the stock to keep running as well.

3. UiPath

Perhaps you've heard the buzz on Wall Street regarding artificial intelligence (AI) -- the trend capturing the imaginations (and dollars) of investors. But UiPath might be one of the few overlooked AI stocks, even though its long-term upside could be substantial.

Overhyped bandwagons can be bad for investors -- when investors all hop into the same stocks, valuations can get stretched to the max. However, buzz can be good for business. For example, managers might suddenly start considering AI and how it can improve their companies. And that's good for UiPath.

The company is a recognized leader in robotic process automation: AI software that does repetitive, menial tasks automatically. As businesses look to leverage the power of AI, they'll look to the top dogs in the space first, and UiPath is one of them.

Some might rightly point out that revenue growth has steadily slowed since it went public in 2021. However, as a subscription business, looking at annual recurring revenue (ARR) is crucial. And recent ARR trends might paint a different picture.

Source: UiPath's filings. Chart by author. Net new ARR refers to the net increase in ARR from one quarter to the next, accounting for any attrition. QoQ = quarter over quarter.

Businesses sign deals with UiPath, which is reflected in the ARR number. But there's a delay between signing a contract and recognizing revenue from an accounting perspective. Therefore, the general acceleration in net new ARR throughout its fiscal 2023 could be a sign of a reacceleration in UiPath's revenue growth in the near future.

While UiPath's ARR growth is improving, so is the company's profitability. To be clear, it is very far away from net income according to generally accepted accounting principles (GAAP), which means this stock isn't for everyone. But its GAAP operating loss of $348 million in fiscal 2023 was much improved from its operating loss of $501 million in fiscal 2022. Moreover, the company's non-GAAP operating profit is expected to nearly double year over year in fiscal 2024 to about $120 million.

UiPath has plenty of upside as AI drives operating efficiency at companies around the world. And with $1.4 billion in cash and no debt, the company has a measure of safety despite steep GAAP losses.

Of these three companies, I believe that UiPath could have the most long-term potential upside, whereas Airbnb might have the least long-term downside.

And for a mix of limited downside and high upside, Boot Barn stock might be the one I'd go with today. The valuation is reasonable, its track record is impressive, and management's long-term outlook could create a lot of shareholder value.