The stock market indexes recently made new all-time highs. A resilient economy, interest rates that should trend down, enthusiasm for an expected corporate-friendly incoming administration, enthusiasm for artificial intelligence (AI), and high-flying tech stocks like Nvidia and Microsoft all play a role in this bull market.
Investors should exercise some caution at these levels. Remember that 2021 euphoria quickly turned to dread in 2022. There are pockets of the market that resemble 2021 now. For instance, Palantir‘s stock trades for 56 times sales and over 160 times forward earnings. It’s a terrific company, but this is a nosebleed valuation by any measure.
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However, some companies still trade for reasonable valuations with long-term positive trends. Here is one to consider.
Vacation habits are changing. Younger generations book vacation rentals at a higher rate than older generations, who stick more to traditional hotels. As shown below, the number of vacation rental users will rise 25% from 2024 to 2029.
The trend means that Airbnb (NASDAQ: ABNB) has a long-term tailwind. Airbnb is also highly successful now.
Revenue hit $3.7 billion last quarter on 10% year-over-year growth, and operating income reached $1.4 billion on fantastic 37% growth. However, what I like most about the company is the ability to produce free cash flow. Airbnb operates with a lean business model and doesn’t have significant capital expenditures (capex) needs, so much of its revenue falls into the company’s pocket. Of the $10.8 billion sales over the past 12 months, $4.1 billion was converted to free cash flow, a terrific 38% margin.
Having tremendous free cash flow allows Airbnb to fund growth, maintain a fortress balance sheet, and repurchase shares. As of the third quarter, the company reported $11.3 billion in cash and investments against just $2 billion in long-term debt. The company also repurchased $2.6 billion in shares through three quarters of 2024, amounting to more than 3% of the company’s current market cap.
Airbnb stock trades at a similar valuation to its rival Booking Holdings (NASDAQ: BKNG) based on free cash flow, as shown below.
This makes sense, as the business models and financial results are similar. It also shows the importance of free cash flow in valuing these companies. Airbnb is trading slightly below its recent average and well below recent peaks.
Both are terrific investment options; however, Airbnb’s market cap is around half of Booking’s, so it has more room to compound.
The most significant risk to Airbnb is regulatory. Many localities and homeowners associations have rules limiting short-term rentals. Airbnb works proactively with policymakers to craft mutually beneficial regulations to mitigate the risk.
Airbnb will benefit from the long-term trend toward vacation rentals. The rapid rise in users and its top-notch financial results make the stock an excellent long-term pick.
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Bradley Guichard has positions in Airbnb and Booking Holdings. The Motley Fool has positions in and recommends Airbnb, Booking Holdings, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Brilliant Growth Stock to Buy Now and Hold for the Long Term was originally published by The Motley Fool
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