Airbnb (NASDAQ:ABNB) stock drifted lower since the Feb. 25 release of its first annual earnings statement since going public on Dec. 10. Airbnb is down 1.7% since that report.
However, the stock is up 27.5% since the beginning of the year and up 163% from its IPO price. My analysis is that ABNB is still undervalued. Here is why.
In my last article, I valued the company based on a “take rate” comparison with Square (NYSE:SQ). However, as both companies have released earnings for the full year, and analysts now have projections for sales for the next two years, I can update this analysis.
In addition, I have added in a new model in comparison with Square – a free cash flow (FCF) yield model. Averaging the results of both of these models allows me to forecast that ABNB stock is worth $210, or about 18% more than its current price.
Take Rate Model Comparison with Square
Both companies have excellent business models. Although Airbnb’s sales were down year over year, and Square’s rose, ABNB has a higher take rate. I talked about this in my last article, but this amounts to the level of net sales generated from inventory or transaction volume. For example, Airbnb calls this its gross book volume (GBV), whereas Square calls this its gross payment volume (GPV).
It turns that last year, Airbnb made an average GBV of 14.1% versus just 4.39% of GPV at Square. Square’s GBV does not include its Bitcoin (CCC:BTC-USD) sales volume which was substantial and would distort the comparison.
In the two tables, you can see that although Square had $112 billion in GPV it made just $4.9 billion in sales, which is a take rate of 4.39%. The comparable take rate at ABNB is 14.4%.
Therefore, it stands to reason that $1 of gross volume is worth 3.22x more at Airbnb than $1 of volume generated at Airbnb. And remember most of this volume is generated online, so that makes Airbnb’s sales more valuable by a factor of 3.22x.
The next table shows how I applied this, using future sales expectations in the next two years.
For example, in the first table note that ABNB has an enterprise value-sales multiple that is 21.6x versus 13.4x in 2021 for Square. That reflects a premium, but not enough. The second table shows that the actual EV sales ratio should be 43x in 2021 and 29x in 2022, given Airbnb’s higher value sales (using take rate analysis).
The net result is that by 2022, ABNB stock should be worth $320.75, or about 79% higher than today.
But that is not the only comp we should use. It turns out that Square, although having a lower take rate, is more profitable, using free cash flow (FCF) analysis.
You can see the different FCF projections I have made for both companies and the resulting FCF yield. FCF yield means you divide the projected FCF by the market value of the company the price today for ABNB stock or SQ stock.
But here is the thing. Since Square is 59% more profitable than Airbnb (i.e., 7.3% projected FCF margin versus 3% in 2022), the ABNB FCF should be adjusted. This is seen in my next model in the table.
You can see that the proper FCF yield for ABNB stock should be 0.32% versus 0.18% today (remember, a higher yield leads to a lower stock price).
The table shows that the implied price for ABNB stock should be just $99.96, implying that ABNB stock is worth 44% less than today.
What ABNB Stock Is Worth
So, we have two valuation models. The first, applying take rate analysis to EV-sales multiples, results in a much higher stock price for ABNB stock, or $320.75 per share.
The second, applying FCF margins analysis to FCF high yield comparisons between the two stocks, results in a much lower price of $99.96.
The next result, seen in the table at the right, as an average of both valuation models, is $210.35 per share, or 18% above today’s price.
Keep in mind there are a lot of assumptions in these models. Changing the FCF estimations, for example for ABNB in the next two years, could result in a very different price target. Therefore, you can see that there is still value left here in the price of ABNB stock which can be realized eventually by a patient investor.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.