Growth stocks have fallen out of favor with the market recently, which is precisely the scenario I prefer when investing. The pessimism creates opportunities to buy excellent businesses at bargain prices.
So, which growth stocks am I eyeing while others run from the market? Right now, my top growth stock to buy is worldwide travel facilitator Airbnb (ABNB 1.83%). The company is positioned to thrive as consumer demand for travel surges higher in anticipation of summer and loosened COVID restrictions. What’s more, the broader market’s growth stock sell-off has the travel booking platform trading at a relatively bargain price. Let’s take a closer look at why Airbnb stock offers such great value for investors right now.
An asset-light business model makes for solid cash flow
It all starts with a smart business model. Airbnb does not own the properties listed on its platform. Instead, it encourages folks who have extra space in their home or who own a vacation house to list those properties on the platform. When a guest books a location, Airbnb facilitates the transaction and takes a percentage of the value for itself as revenue.
This asset-light strategy gives the business flexibility to expand when demand is high and contract when it’s low, as was the case at the onset of the pandemic. Traditional hotel companies do not have this same luxury. It would be a more significant challenge for a hotel operator to expand in response to surging demand. Similarly, how would a hotel operator shrink in times of recession?
Airbnb’s ability to adjust according to broader economic trends also has a positive impact on the company’s cash flow from operations. As the chart below shows, it’s easier for a growth stock to build cash when it does not need to make significant capital investments to expand.
As an investor, I certainly prefer Airbnb’s dynamic approach to the stiffness of the traditional hotel industry. And from the looks of it, travelers seem to agree. Airbnb’s revenue surged 77% to $6 billion in 2021, after falling by 30% to $3.4 billion in 2020 due to the outbreak.
Interestingly, while the rest of the travel industry has largely yet to recover from the COVID-19 downturn, Airbnb’s latest first quarter results reflected an 80% increase in revenue compared to Q1 2019, and a 70% increase from Q1 2021. Indeed, worldwide spending on hotels and resorts recovered to $950 billion in 2021 but was below the $1.5 trillion it reached in 2019. These metrics highlight that consumers are increasingly willing to choose Airbnb as consumers start taking their long-delayed vacations. That’s excellent news for Airbnb’s prospects over the next several years.
Airbnb stock is trading at a bargain valuation
Airbnb has yet to consistently deliver profits on the bottom line, so investors can’t use the price-to-earnings ratio to value the business. Still, when one measures the company through its price-to-sales (P/S) ratio of 11.5 or the price-to-free cash flow of 27.6, Airbnb’s stock is arguably cheaper than it’s ever been. Especially considering the company’s excellent prospects, that inexpensive valuation is worth jumping on.
Few people would argue against the idea that Airbnb will benefit as demand for worldwide travel rebounds. Still, the bears may say that a P/S ratio of 11 is expensive on an absolute basis. But for an asset-light business with phenomenal growth prospects ahead, I believe the premium is justified.
Of course, Airbnb’s business is not free from risks and competitive pressures. Traditional hotels can offer consistent quality and cater to consumer expectations, whereas Airbnb has little control over its hosts. However, I believe the platform will grow to capture a meaningful share of the travel market alongside traditional hotels and resorts. Airbnb does not need to put the competition out of business in order to deliver solid investment returns for shareholders.
Overall, the bargain value and excellent prospects considerably outweigh potential risks, and for that reason, Airbnb is my top growth stock to buy right now.