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Airbnb (ABNB) reported on Aug 3 that its Q2 free cash flow (FCF) remained strong. The results showed its trailing 12-month FCF margin remained strong at 43% of revenue. This gives ABNB stock good upside at its price today of $138.19 in early trading on Aug. 8 and profitable options plays.
This can be seen in the Q2 shareholder letter, where Airbnb said that its Q2 free cash flow was $900 million. That was up 13% from the $796 million from a year ago, although it was down from the $1.6 billion in FCF from Q1.
FCF Margins Stay High
I discussed this massive FCF in my July 14 Barchart article, “Airbnb Stock Is Still Soaring, Making It Popular With Option Traders.” I suggested that if this FCF and its FCF margins stayed elevated, the stock could benefit.
For example, the Q2 FCF margin was 36% vs. the 38% FCF margin in the year-ago quarter.
Moreover, in its Q2 shareholder letter, Airbnb reported that its trailing 12-month FCF margins actually rose. This can be seen in the table below. It shows that the average FCF margin the company had over the last year during Q2 was 43% vs. 39% a year ago.
The company said that the increase in cash flow was driven by revenue and bookings growth as well as net margin expansion.
We can use that to set a price target for ABNB stock.
Price Target for ABNB Stock
One way to do this is to use the FCF margin and apply it to revenue forecasts going forward. For example, Seeking Alpha reports that its survey of analysts projects $9.84 billion in revenue for 2023 and $11.06 billion for 2024. That implies an average of $10.45 billion in sales over the next 12 months.
Then if we apply the 43% average TTM FCF margin to this $10.45 billion in forecast sales, we get $4.5 billion in projected FCF over the next 12 months. We can use that to set a price target.
For example, using a 4.0% FCF (i.e., 25x FCF), Airbnb should eventually have a market capitalization of $112.5 billion (i.e., $4.5b x 25). And using a 3.33% yield (i.e., 30x FCF), its market cap could rise to $135 billion.
Therefore, given its $90.3 billion market cap today, this implies ABNB stock could be worth 24.6% to 49.5% higher. This provides a price target of between $172.18 and $206.59 per share.
Shorting OTM Puts as a Profitable Option Play
In my previous ABNB article, I discussed a strategy of selling short the July 28 expiration put options at the $136 strike price with a huge premium of $2.22 per put contract.
That gave investors an attractive 1.63% yield with just 2 weeks before expiration. Those puts expired worthless as ABNB closed at $153.33. That means the traders had a very profitable trade, which can now be repeated, even though ABNB stock is lower.
For example, today traders can sell short Sept. 1, 2023, expiration put options at the $135 strike price and collect $2.26 per put premium shorted. That provides a good yield of 1.67% with just over 3 weeks until expiration.
That means that the investor who secures $13,500 in cash and/or margin with their brokerage firm can then enter an order to “Sell to Open” 1 put contract at $135.00 for expiration on Sept. 1. The account will immediately receive $226, which represents 1.67% of the money invested.
If this can be repeated every 3 weeks the investor could then potentially make 28.4% annually.
This is one way that investors can make good money using options to play the potential upside in ABNB stock, given its huge FCF margins.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
