Despite high inflation, demand for travel has been surprisingly strong over the last year, and long-term prospects also look favorable. The travel and tourism industry is projected to grow at a mid-single-digit rate to reach $1 trillion by 2027, according to Statista, which is consistent with the historical growth of the industry.
Two travel stocks have room to run over the next few years and beyond. Airbnb (ABNB 0.75%) has grown much faster than the travel industry over its history. With the stock trading at a reasonable multiple of trailing earnings, it looks like a no-brainer long-term investment.
Another stock that should be high on your radar is Carnival (CCL -0.66%). Cruise demand has also been very resilient, but the stock hasn't kept up with the company's actual growth and trades at a bargain valuation.
Airbnb
Airbnb has become a go-to platform for people looking for alternatives to hotel chains. Guests continue to stay longer, which is fueling strong growth. In the second quarter, revenue grew 18% year over year and more than double the same quarter in 2019.
With over 115 million nights and experiences booked on the platform last quarter, Airbnb is starting to pump out a lucrative stream of revenue. The company produced a net profit of $650 million on $2.5 billion of revenue. It has plenty of resources to make its service even better.
With consumers trying to stretch their dollar further in this high-inflation environment, Airbnb is responding with more affordable options for guests. New features like Airbnb Rooms and reduced service fees for the third month of long-term stays can go a long way to fueling more demand. Reduced pricing will only cast a wider net for travelers looking to stretch their dollar.
The steady flow of upgrades Airbnb makes to its platform every year is a direct reflection of its high-margin business model. The company's growing profitability is proving to be a competitive advantage against less profitable hotel chains. This will pave the way for more platform upgrades to make Airbnb's service even more attractive.
"We have some big ideas for where to take Airbnb next. And we're building the foundational capabilities for these new products and services that we plan to launch in the years to come," CEO Brian Chesky said on the Q2 earnings call.
The stock looks expensive at a forward price-to-earnings ratio of 37, but the company's momentum and growing supply of affordable listings will lead to more growth. With analysts projecting earnings growth of 22% per year over the next five years, the stock is a no-brainer for the long term.
Carnival
Investors looking for a value stock in the travel industry should look no further than Carnival. The cruise market was slammed during the pandemic but demand has been very strong, with long-term forecasts also looking favorable. Global revenue for the cruise industry is expected to grow 42% to $35 billion by 2027, according to Statista.
Carnival reported record second-quarter revenue of $4.9 billion, driven by accelerating demand and record bookings for future sailings. While this is more than double the revenue reported in the year-ago quarter, the stock hasn't responded. It is still hovering near its lows, 79% off its previous peak, which makes it a screaming buy.
The reason the stock is down is weak profitability. Carnival reported a $407 million net loss in the recent quarter, where $542 million of interest expense on the company's debt wiped out what would have been a profitable quarter. But management is in the process of paying its debt down, which it expects to yield an additional $275 million boost to the bottom line this year.
Moreover, Carnival is not done growing revenue. Management is looking to raise ticket prices, where there is a big gap between the value of cruise vacations and land-based travel. Land-based offerings were marginally more expensive before the pandemic but cruises are now as much as 50% cheaper.
This enormous value gap is partly helping cruise demand, but that's also why Carnival should be able to ask for marginally higher prices without losing customers. In addition, management is working on several initiatives to maintain record onboard spending, while building and expanding capacity.
Revenue and profitability are headed in the right direction, but the stock is still trading at a decade-low price-to-sales multiple of just over 1. The stock's average P/S multiple in the decade leading up to the pandemic was 2.1. If Carnival can bring its profit margin back up to the 12% average before the pandemic, the stock could double in value toward its previous valuation range.
