Here is my best stock to buy in August
Global travel agency Airbnb (NASDAQ: ABNB) was increasing rapidly before the pandemic temporarily cut off almost all travel. With 4 million+ hosts opening their homes to customers, the company offers great variety to travelers. On Airbnb, you can book a stay in a treehouse, a castle, a farm, a house by the sea, or a room in an apartment.
The wide choice is a hit with travelers because it increases the chances of finding a place that meets their needs. Additionally, endless selection gives Airbnb a wedge around its business, as this selection makes it difficult and expensive to equalize a competitor.
As economies around the world strive to reopen, Airbnb’s variety will help it take advantage of the pent-up demand that has developed among people wishing to travel again. And it was this pent-up demand that made me choose Airbnb as my best stock to buy in August.
Ready for a travel rebound
Airbnb revenue has already rebounded above 2019 levels, mainly due to the US short-haul market. People feel more comfortable getting in their car and traveling somewhere nearby. The United States is in the forefront of countries to vaccinate its population against COVID-19. And unsurprisingly, people who have been vaccinated feel better about their protection against COVID-19.
The travel industry just needs a rebound. As of this writing, more than 4.3 billion doses of the COVID-19 vaccine have been administered worldwide. The growing confidence in travel is also reflected in Airbnb’s advanced bookings. In its most recent quarter, unearned charges, which are nights booked but not yet lived, increased 43.7% from the same period last year.
Just to be clear, this is just the start of the travel rebound. Many restrictions on international travel remain in place and are only slowly starting to ease. It could be well towards the end of 2022 before travel fully returns to normal.
In the short term, Airbnb is still only a small part of the entire travel industry. According to Statista, the hotel and resort industry was worth $ 1.2 trillion in 2019. To put Airbnb’s size in context, it generated $ 4.8 billion in revenue in 2019.
In addition, its light asset business model gives it the potential to generate higher profit margins than hotel operators. Over the past decade, Hyatt Hotels (NYSE: H) generated an operating profit margin of 5.7%. Maintaining and staffing hotel structures can be costly. Airbnb does not have this constraint. It simply brings the host and traveler together and collects a generous fee to provide the platform and support.
The profitability outlook has been further strengthened by the cost-cutting measures taken by Airbnb during the pandemic. Forced to take a closer look at spending, the company slashed its workforce by 25%, suspended new buildings and cut capital spending.
Pay for quality
Interestingly, Airbnb stock has only risen by 2.2% year-to-date despite positive developments against COVID-19. Several effective vaccines have been approved, 4 billion doses have been administered and further advances are underway. This has given governments the confidence to reopen economies and slowly remove travel restrictions.
The stock is trading at a futures price-to-sell ratio of 17.06, which is certainly not cheap. However, the company has a long road to growth ahead of it. The potential for effective growth over several years makes the high valuation tolerable.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.