Among the hundreds of options investors can choose from on equity markets, some companies look almost too attractive to pass up. These corporations typically have several key traits, including being the leaders in their respective industries, boasting competitive edges, and still having plenty of upside growth opportunities.
Stocks that tick all these boxes often deliver superior returns over long periods. Let's consider two examples: Roku(NASDAQ: ROKU) and Airbnb(NASDAQ: ABNB).
1. Roku
Streaming giant Roku has faced several headwinds in the past couple of years. Rising prices have made it harder (i.e., more expensive) to get its famous namesake players to market. Roku also experienced a drop in top-line growth due to a decline in advertising spending.
These (and other) issues explain why Roku stock is down by a massive 82% in the past three years. The company is rebounding, though. In the first quarter, Roku's net revenue of $741 million increased by 19% year over year. The company's streaming households and hours also saw healthy increases.
But what exactly makes Roku a no-brainer stock? In my view, it is the company's prospects in the streaming industry, that, despite its seeming ubiquity, still arguably has decades of growth ahead. Roku's potential to be one of the long-term winners in this field makes the stock a buy, especially at current levels.
Let's unpack that a bit more. Just how much growth is left in streaming? The industry is experiencing a shift in how people entertain themselves.
Streaming is more convenient. Shows are created based on user habits and can be watched in bulk on various devices. Still, old habits die hard. People who are accustomed to cable won't give up that easily. That's why cable still dominates, more or less, among older people in the U.S. As time goes by, though, expect cable to continue its slow descent into insignificance. In April, streaming accounted for 38.4% of total television time in the U.S., up from 34% in April of 2023.
This is in one of the most penetrated markets, so the worldwide opportunities remain vast. As streaming grows in prominence, advertising will follow viewers there -- that will provide a massive boost to Roku, especially as it builds its network effect. The more households use its platform -- and the longer they stay glued to their screens -- the more attractive it becomes to advertisers. Meanwhile, Roku's forward price-to-sales ratio is just 2.1 as of this writing; anything under 2 is generally considered undervalued.
ROKU PS Ratio (Forward) data by YCharts
Roku's valuation has dropped like a rock in recent years, and at current levels, it seems more than fair considering the company's prospects. That's why Roku is an excellent stock to buy right now and hold onto for a while.
2. Airbnb
People love to travel. Airbnb helps make trips easier by providing accommodations and activities on its platform. The company's vast library of private residences offers some perks that many hotels don't, including amenities and a level of privacy (in many cases) that somewhat compares to people's own homes.
Though Airbnb's business suffered in the early days of the pandemic, the company has bounced back and continues to deliver solid results. In the first quarter, its revenue of $2.14 billion was up 18% year over year.
Airbnb's net income of $264 million was up 126% compared to the year-ago period. It also reported healthy growth in the number of nights and experiences booked, free cash flow, and net profit margin.
Yes, Airbnb's growth rates have declined in the past couple of years. The boom it experienced following government-imposed lockdowns came to an end. The most important point is that the company's business survived the outbreak and performed even better after, with consistent profits and growing free cash flow.
There are good reasons to expect the stock to deliver outsized returns in the next decade, too. Here is one: Airbnb boasts a strong network effect. Hosts tend to gravitate toward those platforms with the largest number of guests and vice versa. Airbnb is a leader in this niche, and although it faces stiff competition from the bigger Booking Holdings, Airbnb has been successful despite this fact, likely partly due to its network effect.
Here's another exciting development for Airbnb: The growth in remote work allows many people to be away from home for long periods. Airbnb has highlighted the growth of long-term stays on its platform in the past couple of years. In the first quarter, the company said the number of nights booked for stays of three months or more increased by 25% year over year.
Be it for long-term or short-term stays, people's desire to travel won't subside anytime soon. Airbnb is one of the most notable brand names in the game, and its business continues to deliver. The stock looks like a good pick for long-term investors.
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Prosper Junior Bakiny has positions in Roku. The Motley Fool has positions in and recommends Airbnb, Booking Holdings, and Roku. The Motley Fool has a disclosure policy.
