Is There Value In These Growth Stocks?

Key Points

• AirBnB and Atlassian are both down significantly from their 52-week high.  AirBnB and Atlassian are both down close to 50% from their 52-week high.
• Sales for AirBnB grew by 57% Q/Q meanwhile sales for Atlassian grew 35% Q/Q.
• Valuation continues to be high for both stocks with AirBnB and Atlassian currently trading at 10 price-to-sales
• Both these companies continue to grow quickly at a time when growth stocks have significantly retreated, considering the future economics of the company there could be value in the stocks.

Travel Drives AirBnB Revenue

AirBnB NASDAQ: ABNB continues to grow quickly largely as an increasing number of travelers look to alternatives to hotels.  The average occupancy rate has been creeping up slowly and now is close to 52%, with an average price per room around $140.

During the latest earnings call the CEO stated the following:

"From a growth perspective, we exceeded 103 million nights and experiences booked. Now, this was our largest quarterly number ever. Revenue was $2.1 billion, up 58% from last year or 64%, excluding foreign exchange. Gross booking value was $17 billion, up 27% from last year or 34% if you exclude foreign exchange. Now both revenue and GBV were 73% higher than in Q2 2019, significantly outperforming the travel industry. Now from a profitability perspective, we had our most profitable Q2 ever."

Ever since COVID caused global economies to shut down a lot of people who were looking to travel are now making up for lost time, which is leading to significantly higher travel from a base effect. A lot of countries are still partially shut and that is leading to below-par travel. Despite global macroeconomic headwinds, the travel industry is relatively resilient. Travel is expected to continue to grow into 2023, and occupancy rates should rise to around 55-60%, although it remains to be seen whether prices will go up. That should help continue to drive revenue higher.

The current trailing price-to-earnings is at 50, and the net profit margin for the latest quarter stands at 16%. The net profit margin could easily rise to 20%, over the next couple of quarters as AirBnB tightens costs, and improves utilization. The combination of the two could drive the P/E to 30x earnings.

AirBnB’s prices are not too different from that of hotels, and questions remain about whether people will choose to forego hotels over Airbnb, and whether the trend of renting temporarily will last. But for now, AirBnB continues to do well, and customers are sticking with the platform.

Atlassian Continues to Outperform

Atlassian NASDAQ: TEAM is another company that continues to see a significant pace of growth. The company’s Jira software has become central to developers and has one of the highest gross profit margins in the general tech industry at 83%. Despite companies cutting back on tech talent, the CEO stated the following:

“We’ve observed over the years that developers tend to be the last roles companies scale back on,” they wrote. “We believe this will continue to prove true, especially for the overwhelming number of organizations undergoing digital transformation. Second, whilst our products punch above their weight in terms of value, Atlassian is a relatively small line item in overall IT budgets and likely not where customers look to reduce costs.”

Despite the fact that Atlassian's  SaaS and apps business is increasingly central to many developers' work it retains only about 7% market share, which means it has a lot of room to grow. Their main software product including Jira, Confluence, and Trello, which was a recent acquisition, all continue to outperform and the lack of competition is playing in its favor.

But issues remain with profitability, and Atlassian continues to have very high levels of operating expenses, which has led to losses for the last few quarters. Analysts believe that the management is focused on growth, and will not look to step off the pedal at least for a few more years as it looks to take the market share to a much higher level where. In the meantime, the operating cash flow remains around $883 million and that should ensure the company remains capitalized for the foreseeable future.

Both these stocks could play a long-term role in those looking for stocks with a strong competitive advantage and plenty of room to grow.