Anticipation: A Specific Shareholding That may surpass Verizon's Value by the Fifth Year's End
Dive into the investing world with the wise words of hockey legend Wayne Gretzky, who emphasized that success often lies in anticipating the future, not dwelling on the past. This mindset is crucial for investors, too, as spotting and capitalizing on secular trends can lead to massive returns.
Take, for instance, the foresight to invest in Amazon back when the internet was still in its infancy. If you staked $10,000 on the e-commerce giant at its initial public offering (IPO), you'd now be sitting on a staggering $22 million worth of shares.
Unfortunately, long-time favorite investment choice, Verizon Wireless (VZ -0.12%), has struggled lately, with poor returns compared to the S&P 500 index over the past five years. Many investors still seek out Verizon for its high dividend yield of 6.8%, but the recent financial figures paint a grim picture. Cash flow, earnings per share, and operating income are all down, while debt is up and revenue remains almost stagnant. It's time to shift our focus to the future.
Unlocking Airbnb's Potential
Short-term rentals, such as those listed on Airbnb (ABNB 14.45%), are set to benefit from several powerful tailwinds. The most striking is demographics. A whopping 36% of Airbnb users fall between the ages of 25 and 34, with just 7% and 5% falling in the 55-64 and 65+ age brackets, respectively. As these younger generations mature and accumulate wealth, theirLove for vacation rentals is likely to grow, fueling the rental market.
Additionally, market-sizedecreased to $100 billion in 2024 but is projected to expand to $125 billion by 2029, providing Airbnb with a prime opportunity to expand its footprint. The company's impressive revenue of $11 billion over the past 12 months highlights the potential for even greater growth.
What truly sets Airbnb apart is its extraordinary free cash flow. Essentially, free cash flow is the money left over after expenses and capital investments are covered. Airbnb managed an exceptional 38% margin in this regard over the last year, with $4.1 billion of its $11 billion in revenue going directly to fund its growth and reward shareholders.
Verizon's margin, on the other hand, only reached 10% due to its less-efficient business model and significant capital investment needs. This contrasting approach should ultimately drive Airbnb's valuation higher.
The Dividend Question
Sure, dividends can be attractive, but so are share buybacks. Companies like Apple and Microsoft actively repurchase their own stock, and shareholders have profited handsomely as a result. Airbnb, too, has been acquiring shares, spending $1.1 billion in Q3 2024 and $3.3 billion over the previous trailing 12 months.
Buying back shares not only reduces the number of outstanding shares, boosting each share's worth, but it also boosts earnings per share. This, in turn, increases the stock price (assuming everything else stays constant).
While some may prefer dividends for their immediate cash payouts, I personally lean towards buybacks. Not only are shareholders taxed on dividends each year, but buybacks offer companies more flexibility. Buyback amounts can be adjusted and tweaked strategically, without the same level of fanfare or potential negative impact on stock prices that a reduced or cancelled dividend might have.
As of now, Airbnb's market cap sits at $82 billion, while Verizon's is significantly higher at $169 billion. However, their trajectories have diverged significantly since 2023, as you'll see in the graph below.
If Airbnb manages continuous 15% annual growth while Verizon stagnates or shrinks, Airbnb and its shareholders will reap the rewards within five years.
Don't forget that while Airbnb targets younger generations, we also have options for more conventional dividend-paying investments. Check out these alternatives to Verizon for those who can't afford to part with their steady income stream.
- Investors considering diversifying their portfolio might find interest in Airbnb, given its impressive free cash flow and potential for growth, as opposed to investments with lower margins and shrinking returns like Verizon.
- The strategy of buying back shares, as employed by tech giants like Apple and Microsoft, can significantly increase a company's share value and earnings per share, a tactic that Airbnb has also implemented effectively.
- Gretzky's advice on anticipating future trends in the investing world is exemplified by the decision to invest in Airbnb at its initiation, which, based on its current trajectory, could lead to substantial returns compared to a long-term investment in a company like Verizon.
- For investors seeking steady income through dividends, alternative options to Verizon with comparable yields could be explored, providing a balance between potential growth and reliable income streams.
