1 Robinhood stock that could crush the market in the long run

Robinhood Markets (HOOD -0.55%) changed the investing game with the introduction of commission-free trading, and it introduced a whole new generation to the stock market. The average age of a Robinhood account holder is just 31.

Robinhood’s outsized market influence has faded during the current bear market, but it’s always a good idea to keep an eye on what Robinhood traders are buying. Their interests offer a good indicator of what attracts the younger generation of investors.

Robinhood maintains a list of its 100 most-held stocks, and one stock on this list looks particularly attractive right now. Roommate manager Airbnb (ABNB 1.40%) falls roughly in the middle of the list. It also looks set to crush the long-term market. Let’s look at three reasons.

1. Airbnb’s business model is an ATM

In its early years, Airbnb’s profitability was inconsistent as the company invested heavily in growth and was less concerned with the bottom line. However, the pandemic imposed financial discipline on the company. It laid off a quarter of its staff in May 2020 and shut down unprofitable products. As a result, the company’s profitability has soared in recent quarters as travel demand rebounded as the economy reopened.

At Airbnb second quarterthe company reported year-over-year revenue growth of 58%, or 73% from Q2 2019, to $2.1 billion, and GAAP net income reached $379 million, representing a profit margin of 18%. Adjusted EBITDA was even stronger at $711 million, and its free cash flow (FCF) of $795 million translated into an FCF margin of 38%, a level of profitability few companies can match.

Although the summer months tend to be the most seasonal for Airbnb, these numbers show just how effective its market-based business model is at turning revenue into profit.

What is also remarkable about this is that the business requires very little capital expenditure. The company spent just $15.4 million on capital expenditures in the first half of the year. In other words, Airbnb’s technology infrastructure has reached scale, and the home-sharing giant can grow with little investment. This gives it significant leverage over fixed costs, which means that profit margins should continue to increase as revenue increases, all else being equal.

2. Airbnb is gaining share in a huge market

Airbnb didn’t bankrupt the hotel industry, but it changed the industry forever, filling a gap in the market that hotels weren’t filling. Airbnb has made things like kitchens and full apartments available to customers for the first time, dramatically expanding the lodging market. Hotels and online travel agencies like Reserve credits has responded by offering more such amenities, but Airbnb remains the leader in the roommate market and, in fact, has more rooms available than any other hotel chain.

At the time of Airbnb’s IPO in December 2020, it estimated its Usable Addressable Market (SAM), i.e. the market its products currently serve, was $1.5 trillion, while the total addressable market available in hosting and experiences was $3.4 trillion. These are huge markets, and with just $17 billion in gross booking value in its last quarter, Airbnb still has plenty of room for growth if the company can execute on its vision.

3. Airbnb shares are cheap

unlike most growth stocks, Airbnb is highly profitable and growing rapidly at a time when a number of growth stocks are facing hangovers as pandemic tailwinds have died down.

Even though Airbnb’s experience was the opposite of most of the tech sector during the pandemic, it is still punished by market sentiment against pandemic actions. The stock price is down about 50% from its peak at the end of last year, although its growth has remained strong. For the third quarter, the company forecasts revenue of $2.78 billion to $2.88 billion, an increase of 24% to 29% from the third quarter of 2021, as it expects a Adjusted EBITDA of approximately $1.4 billion.

Airbnb didn’t give full-year guidance, but analysts expect $2.17 in earnings per share, meaning its price-to-earnings ratio is just 48, and even higher. low on a free cash flow basis. While the company’s revenue growth rate will moderate as the travel recovery unfolds, it still seems too cheap for a stock with Airbnb’s historically high growth rate, huge market opportunities and proven profitability.

Jeremy Bowman has positions in Airbnb, Inc. The Motley Fool has positions in and recommends Airbnb, Inc. and Booking Holdings. The Motley Fool has a disclosure policy.

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