Airbnb (NASDAQ:ABNB) is in recovery mode. People are traveling more and renting out places to stay on Airbnb. And as this activity increases, its finances will recover as well, especially its return to free cash flow (FCF) profitability.
Its upcoming first-quarter results on May 13 should begin to show this. As a result, expect to see ABNB stock move higher, especially if analysts begin to model in positive FCF.
As it stands, analysts expect to see $718.86 million in revenue for Q1. This is 14.6% lower than last year’s revenue for Q1 (i.e., $841.83 million). It is also lower than revenue in Q4 of $859 million.
Airbnb actually turns this into a positive thing by saying it expected a much higher slump in sales. That is what they did with its Q4 revenue. They said Q4 sales were down by only 22% after expecting almost a 50% decline.
Recovery Valuation
Eventually, the company will return to full recovery. I suspect it may take the rest of this year. For example, in Dec. 2019 its highest quarterly revenue was $1.6457 billion. You can see this quarterly history on page 70 of Airbnb’s latest 10-K filing.
Moreover, on page 60 of the 10-K you can see that during 2018 Airbnb produced $504.9 million in FCF for the year. This worked out to 13.8% of its $3.652 billion in sales that year.
We can use this to estimate the company’s full recovery potential. For example, let’s assume that Airbnb eventually recovers to make $1.65 billion in sales on a quarterly basis. That works out to a $6.6 billion annual run rate. In fact, analysts covered by Seeking Alpha estimate 2022 sales will hit $6.48 billion.
So assuming a 13.8% margin on $6.6 billion in sales, FCF could reach $910.8 million. In fact on the high end, I suspect that FCF margins will expand by at least 50% to about 20%. That would mean Airbnb will generate $1.32 billion in free cash flow.
This figure can be used to estimate Airbnb’s market value. For example, at a 1% FCF yield, ABNB stock would be worth $132 billion. This is calculated by dividing $1.32 billion by 1%. Moreover, at a 0.75% FCF yield, the market cap is worth $176 billion.
Since Airbnb presently has a market cap of $102.73 billion, this implies that ABNB stock is worth between 28.5% to 71.3% higher. That puts its value in the range of $210.44 to $280.54. Let’s call it $250.00. This is based on its ultimate recovery to peak sales and a 20% FCF margin that will likely occur with that peak revenue.
What To Do With ABNB Stock
Analysts are uniformly bullish on ABNB stock at today’s price. For example, TipRanks.com reports that 28 analysts that have written reports in the last 3 months on ABNB stock see its value at $199.14. This represents a 22% gain over today’s price of $163.77.
A similar target is foreseen by 26 analysts covered by Yahoo! Finance ($188.26) as well as by 34 analysts reviewed by Seeking Alpha ($180.45). However, Marketbeat.com reports that 37 analysts have a 5.2% lower target of $163.66.
If we take an average of all four of these analyst aggregation sites, the price target works out to $182.88. This is about 12% higher than today’s price. But keep in mind that these analysts generally are only providing 12-month forward price targets.
My price target of $250, which is 52.7% higher than today, could take up to two years to reach. Therefore, the average annual return will be 23.55% per year on a compounded annual basis. That is a pretty good return for most investors.
But keep in mind that I am using pretty aggressive assumptions. I assume that the company will return to its peak sales, have 50% higher FCF margins and that the FCF yield will be between 0.75% to 1.0%. These are best-in-case assumptions. This is the potential upside of the stock.
Using Probability To Estimate Returns
Let’s say that there is a higher likelihood that analysts’ projections occur rather than my projection. For example, let’s say there is a 60% probability that ABNB rises to $182.99, or 12% higher. That leaves a 40% chance it will go to $250, or 53% higher.
Therefore, the weighted probability is that ABNB stock will rise 28.4%. This is seen by multiplying 60% by 12% (i.e., 7.2%) and adding that to the result of multiplying 40% by 53% (21.2%). So, 7.2% plus 21.2% equals 28.4%. Therefore, our best guess is that ABNB will rise 28.4% to $210.28 per share.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
