Airbnb Inc (ABNB) reported strong free cash flow (FCF) last week for Q1, including a 41% FCF margin over the trailing 12 months (TTM). Using a 3.3% FCF yield ABNB stock could be worth over 50% more at $225 per share. That makes shorting out-of-the-money (OTM) put options attractive here, especially for existing investors wanting additional income.
In morning trading on Monday, May 13, ABNB stock was trading at $148.31. This is from a recent low of $147.05 on May 9, after its Q1 results were released on May 8. As a result, value investors find ABNB stock appealing given its cheap valuation.
Strong FCF Results
The market seems to have reacted to Airbnb's TTM free cash flow margin results which were lower than the prior year's quarter. This was despite higher FCF results during Q1 on a year-over-year basis.
For example, Airbnb said that its Q1 FCF was $1.909 billion, compared to $1.581 billion in the year earlier quarter. Moreover, in the trailing 12 months (TTM) to March 31, it generated $4.165 billion in FCF, compared to $3.790 billion last year.
But the chart above from page 16 of the company's shareholder letter shows that its FCF margin (i.e., FCF/revenue) in the TTM period to March 31 was slightly lower at 39% vs. 41% a year ago.
The market is overlooking the company's strong results. For example, last quarter the TTM FCF margin was just 39% in 2023. So, Airbnb has been generating very high FCF margins. This should lead to a very high stock market valuation.
Airbnb's Strong FCF Margins
Using a 40% FCF margin and applying it to analysts' revenue estimates leads to a strong forecast for free cash flow. As a result, that can be used to value ABNB stock and compare it to today's valuation.
For example, analysts surveyed by Seeking Alpha show that the average revenue forecast for 2024 is $11.17 billion and $12.44 billion for 2025. This means that on a run rate basis, over the next 12 months (NTM) Airbnb should generate about $11.8 billion in sales.
Therefore, applying a 40% FCF margin to this estimate results in a forecast of $4.72 billion in NTM FCF (i.e., $11.8b x 0.40 = $4.72b). That will be 23% higher than the $3.837 billion in FCF generated in 2023.
Moreover, this implies that the value of ABNB stock could be significantly higher than today.
Price Targets for ABNB Stock
For example, let's assume that the company was to pay out 100% of its FCF as a dividend. As a result, the stock would likely end up with at least a 3.33% dividend yield.
So, dividing the $4.72 billion in NTM FCF by 3.33%, which is the same as multiplying it by 30x, results in a market cap estimate of $141.6 billion. This is over 52% higher than its present market value of about $93 billion.
In other words, ABNB stock is worth 52% more than today's price, or about $225 per share. That is based on a 40% FCF margin forecast on NTM revenue and using a 3.33% FCF yield metric.
Other analysts believe that ABNB stock is slightly undervalued. For example, Yahoo! Finance shows that the average price target of 31 analysts is $153.17 per share. However, AnaChart.com, a new sell-side analyst tracking service, shows that some high-performing analysts have much higher price targets.
For example, Kevin Kopelman, a sell-side analyst at TD Cowen, has a high AnaChart performance ranking of 5.27 on ABNB stock. This means that his price targets are very often realized, compared to other analysts, especially on ABNB stock. His latest price target is $170 per share and on average his stock pick price targets are realized in 55 days.
The bottom line is that ABNB stock looks deeply undervalued here and its price target is much higher than today's price. One way to play this is to sell short out-of-the-money (OTM) put options, both to gain extra income and to set a disciplined buy-in entry price.
Selling OTM Puts
For example, look at the expiration period ending June 7, 25 days from now. It shows that the $140 put strike price, which is 4.7% below today's price, has a bid price of $1.49 per put contract.
That implies that a short-seller of these put contracts can make an immediate yield of slightly over 1.0% (i.e., $1.06/$140 = 1.064%). That is a very good return over the long term, especially if it can be repeated.
For example, over the next 90 days, if repeated, this implies that the investor can make an expected return (ER) of 3.19%. That is also a very good ER for most investors. Moreover, it also provides a good buy-in entry point in case the stock falls.
The bottom line is that ABNB stock looks cheap here and shorting OTM puts is an attractive way to play this.
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.
