As the market hits new all-time highs, the favorable environment and upbeat investor sentiment has lifted certain growth stocks more than others. Two dominant industry-leading companies are surging right now amid the momentum.
I'm talking about Airbnb(NASDAQ: ABNB) and Uber Technologies(NYSE: UBER). The alternative accommodations stock is up 18% this year, while the ride-hailing and delivery company's shares are up 24% since the start of 2024 (as of March 15).
These companies make for solid investment candidates right now, especially since they possess one very attractive trait. Let's take a closer look at Airbnb and Uber.
Dominant in their respective industries
At the end of last year, Airbnb said it had 5 million hosts with 7.7 million active listings on the platform. And in 2023, the business handled $73 billion in gross bookings, with 448 million nights and experiences booked. Meanwhile, Uber had 150 million monthly active users. And over the course of the latest 12 months, the company reported $138 billion of gross bookings and 9.4 billion trips.
By operating dominant multi-sided platforms, both Airbnb and Uber benefit from network effects. This is a remarkable characteristic that supports their economic moats. And it helps these companies keep their competitors at bay.
As Airbnb gets more hosts and listings, the service continuously becomes better for travelers. And with more travelers, hosts have a larger target audience. In Uber's case, the more drivers or restaurants it has, the more choices (and lower wait times) there are for riders and hungry customers. In both instances, the larger the network gets, the more valuable it becomes for all stakeholders involved.
Airbnb's network effects are global in nature. Someone in Chicago looking to travel to Europe is a potentially valuable renter to a host in Rome. There are possible connections to be made all across the world. On the other hand, Uber's network effects are more localized. Drivers and riders in the same cities create their own networks. In other words, it would be impossible for a rider in Chicago to be driven by someone in Rome. Perhaps this makes Airbnb's network effects even more powerful than Uber's.
At a certain level of scale, marketplace companies that possess network effects should start to register strong profitability. This is starting to play out. Airbnb reported net income and free cash flow (FCF) of $4.8 billion and $3.8 billion, respectively, last year. These margins were absolutely superb. Meanwhile, Uber generated a surprise operating profit of $1.1 billion in 2023. And FCF came in at $3.4 billion.
Because the technological infrastructures are largely already built out, it should, in theory, carry minimal marginal costs to the business for there to be another ride or delivery, or for a host to rent out an apartment for another night. As Airbnb and Uber see greater and greater activity on their platforms over time, the bottom lines should expand further.
Still a favorable setup for prospective investors
Owning companies that have network effects can be a solid strategy for your portfolio. Of course, investors have to make sure that the valuations are also reasonable. I believe this is still true right now, even though both stocks have soared.
Shares of Airbnb and Uber trade at forward price-to-earnings ratios of 36 and 35, respectively, so they are in the same ballpark in terms of valuation. This represents a premium to the Nasdaq-100 index. But it's justified, in my opinion, because both businesses still have sizable growth prospects.
Investors might want to add these two top growth stocks to their watch lists.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Airbnb and Uber Technologies. The Motley Fool has a disclosure policy.
