Wall Street's analyst ratings range from 1 to 5, with 1 being a strong sell, 2 a sell, 3 a hold, 4 a buy, and 5 a strong buy. Airbnb (ABNB 0.75%) and Vail Resorts (MTN -0.35%) currently have average analyst ratings of 3.5 and 3.3, respectively, placing them somewhere between a hold and a buy. While those scores aren't bad, they are somewhat surprising compared to their growth stock peers.
Considering that the median rating among consumer-facing businesses expected to grow sales by over 10% in the upcoming year is 4.0, it is clear that Airbnb and Vail are not Wall Street's favorite growth stocks. In fact, out of the 162 stocks that met those criteria, Airbnb and Vail held the 23rd and 10th lowest analyst ratings, respectively.
However, given that they enjoy wide moats -- in Airbnb's case, its two-sided network effect, and for Vail, geographic advantages -- I can't help but think that Wall Street may be sleeping on a pair of top growth stocks. Let's explore how these businesses could prove analysts wrong over the long haul.
Airbnb's network effects keep its customers happy
On one side of Airbnb's network are more than 4 million hosts listing homes or other properties in more than 100,000 cities and towns globally. On the other are an estimated 150 million users seeking to rent them -- vacationers, travelers, and an increasing number of people looking to book months-long stays.
This two-sided network is key as incremental value is provided to users for each new host and listing that is added. Simply put, new users are drawn in as new listings are added thanks to an increased supply of options, availabilities, and locations. Over the long term, this creates a powerful flywheel effect that grows stronger as each side of the network grows.
What makes Airbnb particularly interesting at this moment in time is that over the last eight quarters, the number of listings on its platform has grown at an accelerating rate compared to the prior year's quarter. In its most recent quarter, total active listings grew by 18%, helping drive sales growth of 20%.
With this burgeoning selection available to guests, perhaps it is no surprise that Airbnb has earned a net promoter score (NPS) of roughly 40 among users in the 18 to 35 demographic.NPS is measured on a scale of -100 to 100, and simply measures the percentage of a product's users who say they'd be likely to recommend it to their friends, minus the percentage who would be more apt to discourage their friends from using it. A score of 40 on that scale is impressive. Comparably, which conducts NPS surveys, ranked Airbnb as the 19th top brand among millennials and the 35th with Gen Z.
Perhaps most importantly for the company is that its two-sided network appears to be reaching critical mass. Now sufficiently scaled up -- but still with a massive global growth runway ahead -- Airbnb has started generating immense free cash flow (FCF) and net income. Currently, it boasts a net profit margin of 23% and an FCF margin of 32% -- even after accounting for stock-based compensation.
Trading at 25 times FCF, Airbnb isn't wildly undervalued. However, its ever-expanding network and young customer base make Wall Street's views on the company seem pessimistic when we look decades ahead.
Geographic advantages give Vail a wide moat
Anytime I think of Vail Resorts, I am reminded of this quote from Warren Buffett on Walt Disney:
It's kind of nice to be able to recycle Snow White every seven or eight years. You hit a different crowd. It's like having an oil field where you pump out all the oil and sell it. And then it all seeps back in over seven or eight years.
A similar argument could be made for Vail's network of 41 mountain resorts. Once Vail owns a mountain, it is merely a matter of how many subscriptions they can sell and how many times they can send snowboarders and skiers back to the top of it. Create the experience once, then resell it year after year.
Owning five of the top 10 most well-known mountain resorts in North America, the company has built a scalable network that is now 2.3 million subscribers strong. No new mountain resorts of notable size have been developed since the 1980s, so Vail holds a massive geographic advantage over any potential competitors. Its wide moat means that as long as the company operates efficiently, it could generate market-beating returns over the long haul.
And historically, it has done just that, generating a 12% cash return on invested capital over the last decade.
MTN Cash Return on Capital Invested (CROCI) (TTM) data by YCharts.
A company's cash return on invested capital measures its FCF generation compared to the debt and equity used to fund its operations -- the higher the figure, the better. What's important about this 12% mark for Vail is that it easily exceeds its weighted average cost of capital, which has averaged 8% since 2018. Simply put, this means that the company generated value for shareholders as it grew and has been an efficient operator -- as evidenced by its 362% total return since 2013.
Leveraging its FCF-generating know-how, Vail is now turning to international markets for growth, establishing partnerships in Europe and Japan. With the European ski market alone generating three times the number of guest visits as the North American market, there is immense growth potential there.
Best yet for investors, after management briefly paused payouts in 2020, Vail's dividend is back, and is now yielding 3.3% -- higher than its pre-pandemic levels. Trading at 26 times FCF, this restarted dividend growth pairs beautifully with Vail's efficient operations and wide moat, giving it a great shot to prove Wall Street wrong over the long term.
