Depending on how you slice it, stocks may have already entered a new bull market. The S&P 500 has rallied more than 16.5% year to date, while the Nasdaq Composite index has soared more than 23%. But while index-shaping titans, including Nvidia, Microsoft, and Apple, have recently rocketed to record highs, there are still some great growth stocks that trade at big discounts.
If you're on the hunt for investment opportunities that could deliver impressive rallies in this market, read on to see why building a position in this top company could have a huge payoff.
This hot growth stock has room to run
With the company's share price up roughly 68% in 2023, Airbnb (ABNB -1.52%) has already seen some strong gains across this year's trading. On the other hand, the stock remains down roughly 34% from its high despite the company generally recording strong business performance.
Airbnb grew its free cash flow 49% annually last year to reach $3.4 billion and swung into GAAP profitability with a net income of $1.9 billion. Revenue for the year rose 40% to reach $8.4 billion. On a currency-adjusted basis, annual sales growth was even more impressive -- coming in at 46%.
While the business is seeing some growth deceleration this year due to a challenging basis of comparison and some macroeconomic pressures, it has continued to post encouraging sales momentum and margins. Revenue rose 20% year over year in the first quarter to reach approximately $1.8 billion, or 24% on a currency-adjusted basis, and the company recorded its first-ever period of Q1 profitability with net income of $117 million. Additionally, the rental specialist recorded its best-ever free cash flow (FCF) of $1.6 billion in the period.
Airbnb has continued to show it can grow profitably at scale, and the company still has a long runway for expansion.
A business with proven flexibility
Airbnb deftly navigated challenges posed by the pandemic and has returned to posting strong growth and record sales and earnings. An asset-light model gives the company flexibility to adjust spending on sales and marketing and other categories, and it's helping the business address current macroeconomic headwinds and uncertainty.
While Airbnb anticipates that average daily rates will see some pressure this year, it expects that cost-cutting and other efficiency initiatives will be enough to offset lower rates and sustain margins. It's even possible that macroeconomic challenges will accelerate the progression of some trends that will benefit the company over the long term.
For example, economic pressures could cause more people to host properties as rental stays to generate supplemental income. Check out this quote from the company's fourth-quarter earnings call outlining growth catalysts for host listings on its platform:
Hosts are attracted to the supplemental income that they can earn on Airbnb, which is often critical during tough times. Second, our product improvements are working. Over the past two years, we've made it more attractive and easier to become a host.
Airbnb is foregrounding supply growth as a major component of its long-term expansion strategy, and things are proceeding at an encouraging pace. The company saw supply growth accelerate in the first quarter, with the number of total host listings on its platform increasing 18% year over year -- up from 16% growth in Q4.
With the rental specialist rolling out its new low-cost Airbnb Rooms offering in the second quarter, supply should continue to expand along an even wider range of price points. This should help continue to attract new travelers to the platform and provide new opportunities for hosts. In general, the company has continued to do a good job rolling out new features and offerings for guests and hosts, and its platform looks poised to benefit from the long-term growth of the travel and property rental markets.
Airbnb is still attractively priced
With a market capitalization of roughly $90 billion, Airbnb is trading at roughly 36.5 times this year's expected earnings.
ABNB Market Cap data by YCharts.
Alternatively, the company is valued at roughly 24 times the $3.8 billion in free cash flow that it generated over the trailing-12-month (TTM) period. With the rental specialist growing FCF 33% year over year in Q1 and its net income margin swinging to 6% from -1% in the prior-year period, there's enough positive momentum here to support the company's growth-dependent valuation.
A TTM FCF margin of 44% shows that Airbnb's business has become a cash-generating machine, and the company looks well-positioned to continue growing revenue at a rate that translates into strong returns for long-term shareholders.
