Hockey legend Wayne Gretzky once said that part of his greatness was because "I skate to where the puck is going to be, not where it has been." In other words, his precise ability to anticipate the next move set him apart from the pack. The ability to anticipate and predict secular trends is also an incredible tool for investors. For instance, if you predicted that online shopping would explode back when the internet was still relatively new and bought $10,000 worth of Amazon stock at its IPO, you could have $22 million today.
Investors have turned to Verizon Wireless (VZ -1.23%) for years, looking for quality returns, and the results haven't been good recently. Actually, its total return over the past five years is abysmal compared to that of the S&P 500 index, as shown below.
VZ Total Return Level data by YCharts
Many people invest in Verizon for its dividend yield, which currently stands at 6.8%, so it's important to note that the total return charted above includes dividends. Verizon's growth is stalled, and 2024 hasn't been great through the third quarter; cash flow, earnings per share, and operating income are all down year over year, debt is up, and revenue is essentially flat. It's time to look at stocks of the future. Here is a suggestion.
Critical trends to boost Airbnb
Short-term rentals, also called vacation rentals, booked through Airbnb (ABNB -2.20%) have significant long-term tailwinds. The largest is simple demographics. Roughly 36% of Airbnb users are aged 25 to 34. For comparison, only 7% are 55 to 64 years, and only 5% over age 65. The implications of this are massive. As the younger folks age, become more established in their careers, and accumulate wealth, they will become a larger portion of vacationers, driving the vacation rental market.
Next, the total market size is forecast to increase from $100 billion in 2024 to $125 billion in 2029, giving Airbnb a growing market to capture. The company reported revenue of $11 billion over the past 12 months, so there is much room to grow. Finally, as shown below, the number of users should skyrocket over the next several years.
Statista.
Airbnb's business model is terrific because it creates immense free cash flow. Free cash flow is essentially the money left after all expenses and capital investments for equipment (known as capex) are made. This goes into the company's pocket to fund growth and reward shareholders. Airbnb pocketed $4.1 billion of its $11 billion in sales over the past 12 months for an excellent 38% margin. Verizon's margin was just 10% over this time because its business isn't as efficient and has significant capex needs. The preferable business model should drive Airbnb's valuation higher over time.
What about the dividend?
Yet there is more than one way to achieve a goal -- and I know there is more than one way to return cash to shareholders. Dividends are one, and share buybacks are another. Companies buy back their own stock to reduce the number of outstanding shares, making each share represent a larger portion of the pie. Buybacks can also increase earnings per share, increasing the stock price, with all else equal.
Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) prolifically repurchase stock, and shareholders have benefited wildly. Airbnb repurchased $1.1 billion in shares in Q3 2024 and $3.3 billion, 4% of the current market cap, over that trailing 12 months. Given Airbnb's excellent free cash flow, buybacks will likely continue in earnest.
Some people prefer dividends since they receive cash upfront, but I prefer buybacks. First, shareholders pay taxes annually on dividends but not on buybacks. Second, buybacks give the company maneuverability. It can increase and decrease them strategically with little fanfare. Companies can't usually cut dividends because they negatively affect stock prices -- it's big news! This means companies pay and even raise dividends when it isn't the best move for the company.
Airbnb's current market cap is $82 billion, compared to Verizon's at $169 billion; however, they have been headed in different directions since 2023, as you can see below.
ABNB Market Cap data by YCharts
If Airbnb rides its tailwinds to 15% annual growth and Verizon continues to tread water or lose ground, Airbnb will be worth more in about five years, and its shareholders will reap the rewards.
I recognize that some investors can't afford to lose their dividend income, so click here to read about a couple of dividend-paying alternatives to Verizon as well.
