Unmissable Long-term Investment Opportunity: Outstanding Growth Stock to Purchase and Keep
Unmissable Long-term Investment Opportunity: Outstanding Growth Stock to Purchase and Keep
The financial markets have hit new record highs lately. A robust economy, anticipation of lower interest rates, enthusiasm for a business-friendly new administration, excitement about artificial intelligence (AI), and popular tech stocks like Nvidia and Microsoft are all contributing to this bull market.
Investors need to be mindful at these levels. Last year's optimism turned into fear in the following year. Certain sections of the market are currently resembling 2021's attitudes. For example, Palantir's stock is selling at 56 times its sales figure and over 160 times its projected earnings. While it's an exceptional company, this valuation is exorbitant by any standard.
However, some companies still trade at reasonable rates with promising long-term prospects. One such company is worth considering.
Don't ignore Airbnb
Leisure habits are evolving. Younger generations choose vacation rentals more frequently than older generations, who tend to favor traditional hotels. As shown below, the number of vacation rental users is expected to increase by 25% from 2024 to 2029.
This trend indicates that Airbnb (ABNB 1.00%) has a favorable long-term trend. Airbnb is also currently doing well.
Revenue reached $3.7 billion in the last quarter, marking a 10% year-on-year growth, and operating income hit $1.4 billion, up by a remarkable 37%. What I admire most about the company is its ability to generate free cash flow. Airbnb operates with an efficient business model and has minimal capital expenditure needs, allowing a significant portion of its revenue to be retained as free cash flow. Over the past 12 months, $4.1 billion of its $10.8 billion revenue was transformed into free cash flow, representing a fantastic 38% margin.
Having a substantial free cash flow enables Airbnb to fuel growth, maintain a strong balance sheet, and repurchase shares. As of the third quarter, the company reported a cash balance of $11.3 billion, with only $2 billion in long-term debt. Additionally, it purchased $2.6 billion worth of shares during the first three quarters of the year, representing more than 3% of its current market cap.
Is Airbnb stock a wise investment?
Airbnb stock's valuation is comparable to its competitor Booking Holdings (BKNG 1.25%) based on free cash flow, as demonstrated below.
This similarity is justified, given the businesses' shared models and results. It also highlights the significance of free cash flow in assessing such companies. Airbnb's stock price is currently lower than its average and significantly below its recent peaks.
Both are compelling investment opportunities; however, Airbnb's market cap is below that of Booking's, leaving more potential for growth.
Airbnb's major risk is regulatory. Numerous localities and homeowners associations have restrictions on short-term rentals. Airbnb actively collaborates with policymakers to create mutually beneficial regulations to mitigate this risk.
Airbnb will benefit from the long-term trend of vacation rentals. Its rapid user growth and impressive financial performance make the stock an attractive long-term choice.
Investors looking for reasonable investment opportunities in the finance sector might consider Airbnb. The company's efficient business model and strong free cash flow, which accounted for 38% of its revenue over the past 12 months, position it well for future growth.
Given that Airbnb's stock valuation is comparable to its competitor Booking Holdings but with a lower market cap, it presents a compelling investment opportunity with more potential for growth.