Unusual options activity in Airbnb Inc (ABNB) stock implies a large investor may have gone long calls in ABNB stock or they have sold covered calls. Either way, this may be seen as a bullish trade in the stock.
So far this year ABNB stock is up over 37%. But since May 1, when it closed at $121.42, ABNB is down $5.07 to $116.35 in before-noon EST trading on Wednesday, June 7. That makes the large call option trade on June 7 stand out.
Barchart reports in its Unusual Stock Options Activity Report today that 963 call options at the $117.00 strike price traded for $5.35 per call contract for the expiration period ending June 30, 2023. This is unusual since the open interest in this strike price is just 106 contracts.
As a result, this trade is over 9x times the existing number of contracts in $117.00 strike price calls expiring June 30. Since this call option is close to the money it is likely that either the investor has gone the calls, or else has an existing position in the stock and they shorted the calls as a covered call play.
However, typically a covered call play like this would be with a higher out-of-the-money strike price. That makes me believe that the investor may have actually gone long the calls hoping that the stock may make a major rebound by the end of the month.
After all, they paid just $5.35 per call option, making the breakeven price for the trade $122.35. As I pointed out above, that is close to where ABNB stock was at on May 1, 2023, when it closed at $121.42. That was the peak right before the company released its earnings on May 9. Let's look at why they may have a bullish position now.
Reasonable Valuation
Analysts expect the company will make $3.45 earnings per share (EPS) this year, up from $1.86 in 2022, its first profitable year. Moreover, next year analysts forecast $3.96 in EPS, a growth rate of 14.8%. At $117 (the strike price), ABNB trades for less than 30x earnings, which is a reasonable multiple, although not cheap, given its growth rate. In addition, Morningstar reports that ABNB stock traded for 127x forward earnings in 2021 and 27.9x in 2022. So, 30 times earnings is not out of the question for the stock, although, again, it only has one profitable year.
Probably more important than earnings is the fact that in Q1 2023 (released on May 9) Airbnb reported massive amounts of free cash flow (FCF). Management said in its shareholder letter that Airbnb generated $1.6 billion in FCF during the quarter and $3.8 billion over the trailing 12 months (TTM). But even more impressive was the fact that revenue was $1.8 billion during Q1. That means that its FCF margin was an astounding 88.9%. I have never seen a company produce a margin this high. In addition, its TTM revenue was $8.708 billion, so the $3.8 billion in FCF it generated over the last year represents a 43.6% FCF margin.
Estimating an ABNB Stock Price Target
We can use this to estimate its FCF going forward. For example, analysts forecast $9.53 in revenue this year and $10.81 billion in 2024. That implies in the next 12 months revenue could average just over $10 billion. So using a 44% FCF margin, we can estimate $4.4 billion in FCF going forward.
Here is why this is important. At today's market cap of $73.93 billion, this means ABNB stock trades for just 16.8x FCF. If we set a 20x FCF price target, the market cap would be $88 billion, or 19% higher than today's price.
That gives investors a price target of $139 sometime over the next year, (i.e. $117x 1.19x). This is likely the reason why the long-call option investor is so bullish on ABNB stock.
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.
