Airbnb Inc. (ABNB) generated huge free cash flow (FCF) and FCF margins in 2023. This could push ABNB stock's value over 26% higher at $211.50 per share. It also could make short-put plays attractive to investors for income, especially long investors in the stock.
On Feb. 13, 2024, Airbnb released its 2023 earnings and reported that its revenue rose 18% to $9.92 billion. In addition, its FCF rose 12.7% from $3.405 billion to $3.837 billion. As such, it generated a huge 38.7% FCF margin (i.e. $3.84b/$9.92b).
This is important since Airbnb can use this FCF to fund its huge buybacks ($2.25 billion in 2023). In fact, its board also announced a new $6 billion share buyback plan. If it takes 2 years to fulfill that program that represents a 2.83% buyback yield, since the market cap is $106.16 billion (i.e., $3b/$106.16b).
Free Cash Flow Targets
However, it also implies that ABNB stock is worth significantly more. For example, the table above from the Airbnb shareholder letter (page 17) shows that its FCF margins have been very high in the past two years - 41% and 39% (actually 38.7%).
This implies that if revenue stays high this year and next year we can estimate its FCF going forward. For example, analysts surveyed by Seeking Alpha have an average forecast of $11.08 billion in revenue this year. And for 2025 they estimate $12.39 billion. That means that sometime in the next 12 months (NTM) the company will have a run rate of $11.735 billion.
Therefore, if we assume that on average the FCF margin will be 40% in the NTM, its FCF will reach $4.69 billion (i.e., $11.735b x 0.40). That is 22.4% higher than last year's $3.837 billion in FCF.
Moreover, that will be more than enough FCF to fund a $3 billion share buyback program each year for the next two years. It also implies that ABNB stock could be worth much more.
Price Target
For example, theoretically, the company could pay out all the FCF as a dividend. The market would likely give the stock at least a 3.5% dividend yield, and it could even rise to 3.0%.
Therefore, if we divide the NTM FCF estimate of $4.69 billion by 3.5% we get a market cap estimate of $134 billion (i.e., $4.69b/0.035 = $134b). That is 26.2% higher than today's market cap of $106.16 billion. Moreover, using a 3.0% FCF yield metric, the market cap could rise to $156.3 billion, or 47% higher.
The bottom line is that in the next 12 months, assuming a 40% FCF margin, it's possible ABNB stock could be worth $211.50 per share (i.e., 1.26 x $167.86 per share). That is good news for existing shareholders, even despite the stock's recent rise.
In addition, they can make extra income while waiting for this to happen by shorting out-of-the-money (OTM) put options.
Shorting OTM Puts for Income
For example, look at the 3-week away expiration period of April 12, 2024. It shows that the $160 strike price put contract, which is a little less than 5% below today's price (6.68% OTM) trades for $1.66 on the bid side.
That means that the short seller of these put options can make an immediate yield of 1.0375% (i.e., $1.66/$160.00). Here is what that means.
Investors who secure $16,000 (i.e., 100 shs x $160 strike price) with their brokerage firm can then enter sell short these puts. They enter an order to “Sell to Open” 1 put contract at $160 for expiration on April 12. The account will then immediately receive $166 (i.e., 100 x $1.66).
That works out to a 1.0375% yield (i.e., $166/16,000). Moreover, if the investor can repeat this trade for the next quarter (i.e., 4 times), they stand to make an expected return (ER) of $664. This produces an ER yield of 4.15% over 90 days (i.e., $664/$16,000).
As long as the stock stays over $160 in the next three weeks the investor's $16K in cash will not be used to automatically buy 100 shares at $160.00 per share. But even if it does fall to this level, shareholders know that the stock could be worth well over $200 in the next 12 months based on its powerful FCF.
A more defensive play would be to sell short the $157.50 strike price. In other words, by securing slightly less money (100 shs x $157.50 = $15,750), the investor has less risk that the stock will fall to this strike price and its secured cash will be assigned to buy shares. However, in return, the yield is lower at just 0.73% since the premium is $1.15 (i.e., $1.15/$157.50 = 0.73%).
The bottom line is that ABNB stock looks undervalued here. It makes sense for long investors to sell short out-of-the-money (OTM) puts to gain income while they wait for the stock to rise.
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.
