Why Peter Lynch would love Airbnb

Peter Lynch is an incredibly successful investor. From 1977 to 1990, Lynch directed Fidelity Magellan Fundgenerating an average annual return of 29.2%, more than double the return of the S&P500 during this time.

Lynch, also known for his books One Up on Wall Street and beat the street, argued that individual investors should buy what they know and that some of the best investment ideas can be found at the supermarket or in conversations with friends. He started with such observations before doing fundamental analysis, to make sure the story made sense.

In addition, he is credited with inventing the IIP reportwhich measures the price-to-earnings ratio relative to earnings growth.

If Lynch were still active, it’s a safe bet that he would be a big fan of Airbnb (ABNB 0.92%)because it has many qualities that it looks for in a stock.

Image source: Airbnb.

A nice story

Airbnb has both a compelling business model and a compelling history. In its early days, the business grew almost entirely through word of mouth, as the concept sells itself.

The home-sharing platform offers owners and tenants a way to earn money from their own home, either by renting out a spare room on a short-term basis or by renting out the accommodation when the host is away .

For travelers, it has also opened up new destinations and created a unique way to travel, where you can get tips from locals rather than a guide or hotel concierge. Airbnb also offers travelers the option of staying in places where there are no hotels, such as rural destinations or residential areas of cities.

The success of the platform speaks for itself. Airbnb now has over 4 million active hosts on its platform, with over 6 million listings. Over its history, it has facilitated over a billion guest arrivals.

The Airbnb brand, as well as the network effects and switching costs inherent in the model, have also made it the undisputed leader in colocation, far ahead of competitors like Expediais VRBO and Vacasa.

A good value

Airbnb shares are also offering a great price right now, especially based on Lynch’s favorite metric, the PEG ratio.

The stock currently trades at a price-to-earnings ratio of 41, which is double the P/E ratio of the S&P 500, but still looks like good value given Airbnb’s growth rate. In its most recent quarter, revenue jumped 29% to $2.9 billion and net income rose 46% to $1.2 billion, demonstrating the company’s strong margins.

Analysts expect the company’s growth rate to slow as it begins to face tougher comparisons and headwinds from the recession are expected to slow the travel industry. Over the next three years, however, the company is still expected to grow its earnings per share by 21% annually, which means its PEG ratio would be just under 2. For a company growing as fast as Airbnb, this seems like a pretty good rating.

However, Airbnb has easily exceeded analysts’ estimates over the past four quarters, so forward estimates could also turn out to be low.

The company also invested in stock buybacks, another favorite Lynch tactic, reducing its outstanding shares and increasing earnings per share.

Overall, Airbnb offers a compelling experience growth story of a market leader in an industry he created. Even better, the stock is very profitable and is trading at a reasonable valuation, especially for a company with its expected growth rate.

If Lynch was still running the Magellan fund, he probably would have hit the buy button on Airbnb today.

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