Operating cash flow (OCF) provides excellent insight into the health of a stock’s underlying business, showing the amount of cash generated before capital expenditures (capex).
This figure is critical for young companies still in the growth phase, as many high-growth stocks reinvest most of the cash generated back into the business. This often leaves little (or negative) free cash flow (FCF) and net income for use in price/free cash flow or price/earnings ratios, making price/operating cash flow (P /OCF) convenient ratio for valuations.
Today we are going to look Airbnb (ABNB -1.99%), Trex (TREX -3.88%)and DigitalOcean (DOCN -5.06%), whose respective low P/OCF of 21, 13 and 20 make them attractively priced. Let’s take a deeper look at each.
1.Airbnb
Generating $3.2 billion in OCF over the past year, Airbnb and its stays and experiences platform is a recent and rare initial public offering (IPO) that succeeded in immediately creating mountains of cash flow. Boasting a 12-month OCF figure that has only increased every quarter since its IPO in December 2020, Airbnb is an outstanding growth stock for cash flow-focused investors.
However, despite this steady growth of OCF and Airbnb which has more than doubled its sales since the start of 2021, its share price has gradually declined since its IPO.
Down nearly 40% in 2022 alone, Airbnb now trades at an enticing 21x OCF – a far cry from the multiple of 60 it stood at at the start of the year.
This low P/OCF figure is well below the S&P500 The index’s median is 27 and looks even more impressive given the company’s incredible growth. By booking nearly 100 million nights and experiences in the third quarter, Airbnb increased sales by 36% (minus currency effects) and OCF by 81% year-over-year.
In addition to having its most profitable quarter ever, the company saw 20% of its total nights booked come from stays longer than 28 days. This stat hints at Airbnb’s continued success in ramping up the “work from anywhere” movement.
Alongside these long-term stays, the company recently announced an agreement with a handful of apartment providers to allow tenants to sublet their rooms on Airbnb’s platform. In what looks like a “if you can’t beat them, join them” move, these apartment complexes have teamed up with Airbnb rather than continue to lose money to tenants who sublet their homes. unused rooms under the table.
This partnership adds another wrinkle to the company’s potential and highlights its growing number of use cases in the future. Thanks to Airbnb’s growing OCF, cheap valuation and intriguing upside potential, its stock looks like a fantastic offer at today’s prices.
2.Trex
Generating $398 million in OCF over the past 12 months, eco-friendly decking and railing manufacturer Trex has achieved steady results despite a challenging residential environment. While its distributors sold through inventory during the downturn, Trex saw sales drop 44% in the third quarter from the year-ago quarter, while still managing to post a positive OCF.
Regardless of this cyclicality surrounding the company’s operations, it has generated strong cash flow over the past decade.
Even though Trex has moved to bolster its vertically integrated manufacturing capabilities by announcing a third production facility in Arkansas, it has remained mostly free cash flow positive despite this increase in capital spending in recent years. . However, with the first nine months of sales in 2022 only up 2% from 2021 figures, the market has sold the company’s shares a staggering 66% year-to-date.
That leaves Trex trading near a decade low of 13 times the OCF.
Still, with 38% of home improvement spending coming from the outdoor living category, Trex has positioned itself to rebound once a homeowner’s financial health improves. Although more expensive than traditional wood options, Trex decking is made from 95% recycled wood fiber and polyethylene film and requires a payback period of only three years due to its low maintenance costs. maintenance.
Thanks to its favorable valuation and the fact that only 25% of decking is currently sourced from environmentally-friendly composite options like those from Trex, it looks like a potential rebound is in store for this cyclically cheap stock.
3. Digital Ocean
A little like Shopify delivers entrepreneurial empowerment to the masses, DigitalOcean seeks to bring simplified cloud operations to those same businesses. Operating behind a hidden moat, DigitalOcean serves a valuable niche of companies and start-ups that are too small for its massive hyperscale cloud peers worry today.
With its simplified infrastructure and platform-as-a-service cloud offerings, the company aims to enable its customers to focus on building great software and not get bogged down in tedious cloud hassles. . Offering support, tutorials, and a knowledge base of information about its cloud services, DigitalOcean can help and grow alongside its smaller customers in ways that would not be profitable for its larger peers.
Although it has only been listed on the stock exchange since March 2021, the company already generates an OCF margin of 36% from its last quarter, most of which is reinvested in the company in the form of capex.
Despite revenue growth of 37% year-over-year in the third quarter, DigitalOcean’s share price has fallen more than 60% in 2022.
Now trading at just 20 times the OCF, it may be time to consider an investment in the business as its sales continue to rise rapidly.
With a net dollar retention rate of 118%, DigitalOcean’s existing customers are increasing their spending faster than ever, which makes its recent sale all the more tempting.
Comments are closed.