It seems there is never a dull moment in the market. This is undoubtedly true recently, as the collapse of Silicon Valley Bank (a subsidiary of SVB Financial) and other banks caused turmoil. Rising interest rates, stubborn inflation, and a wave of tech layoffs have also kept Wall Street on edge.
But these headwinds provide opportunities to long-term investors with some cash to invest. Secular growth industries, excellent free cash flow, and persistent high performance are some things I look for in the companies I seek to invest in.
Airbnb (ABNB) and The Trade Desk (TTD) have those qualities in spades. Let’s take a look.
Airbnb is ahead of the game
When COVID-19 hit in 2020, Airbnb’s business was devastated. Travel came to a screeching halt, and revenue plummeted. The company was forced to lay off many employees and hunker down to survive. Believe it or not, this is benefiting Airbnb now.
Airbnb is now running lean and more profitably. Other tech companies, such as Alphabet, added ten of thousands of employees while the economic stimulus was in effect and are now laying off workers amid narrowing margins. Meanwhile, Airbnb is thriving with staffing still below 2019 levels. As Chief Executive Officer Brian Chesky said on the company’s fourth-quarter earnings call, the result has been a business that is more agile and focused:
What ended up happening is we had fewer people in meetings and people can move a lot faster. And we concentrate all of our very best people and put them on only a few problems. I think that’s been an explanation for why the company has grown really quickly.
And grow it has. Sales for 2022 reached $8.4 billion, an increase of 75% over 2019 (the last full pre-COVID year). Airbnb also posted record operating income, reported an impressive 21% operating margin, and generated $3.4 billion in free cash flow in 2022.
Airbnb stock has fallen 45% from its all-time high and no longer looks outrageously expensive. It trades at a higher price-to-earnings (P/E) ratio than peer Booking Holdings, as shown below; however, Booking Holdings’ sales are up only 13% since 2019 compared to Airbnb’s 75%. So the latter warrants a much higher valuation.
Airbnb’s profitability, growth, and cash flow make it an attractive stock for long-term investors.
Advertisers are flocking to The Trade Desk
Advertisers need to reach consumers on multiple media these days, including display ads on websites and mobile phones, online video, and connected television (CTV). They are also looking for the most bang for their buck, as the challenging economy brings efficiency to the forefront. Offering all of these qualities, The Trade Desk’s platform is in demand.
The company offers advertisers countless advertising opportunities in several different media daily, as well as the data to reach target audiences and track the effectiveness of campaigns. Its biggest growth area is CTV, which allowed The Trade Desk to increase sales in 2022 by 32% to $1.6 billion and post strong earnings before interest, taxes, amortization and depreciation (EBITDA), despite the slowing economy, as you can see below.
SOURCE: THE TRADE DESK.
The Trade Desk sports a lower price-to-sales ratio than before the pandemic, making it enticing for long-term investors.
Both companies have much to offer if you are considering where to allocate $5,000 of your investing dollars. Airbnb is much more profitable on a generally accepted accounting principles (GAAP) basis, so investors looking for growth with less risk would likely be more comfortable investing there. On the other hand, The Trade Desk is a smaller company with more upside potential that might appeal to investors that don’t mind moderate risk. And, of course, splitting your investment between them offers long-term investors the best of both worlds.
— Bradley Guichard
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Source: The Motley Fool