Airbnb (NASDAQ:ABNB) reported its first-quarter earnings with truly impressive free cash flow (FCF) numbers. In fact, the company turned its FCF so impressively positive that I have dramatically increased my price target for ABNB stock. I now think it is worth $304.22 per share, or 103% higher than its Friday, June 25 closing price of $149.67.
You might think this is a little strange, since just prior to the Q1 earnings release, ABNB stock was at $180 on April 28. That’s 20% higher than its price today. In fact, when I last wrote about Airbnb on May 10, I forecast that its target value was $250 per share. At the time, ABNB stock was at $163.77, which is 9.4% higher than the price on June 25.
Between this article and the last, I have increased my price target upside gain from 53% to 103%. Why would I lift my target price even higher now when ABNB stock is lower than my last article? The answer is that its FCF numbers were astounding and merited the change.
FCF and FCF Margins Explode
Airbnb’s May 13 shareholder letter reported that first-quarter revenue rose 5% from $842 million last year to $887 million. However, free cash flow exploded to $487 million in Q1.
Think about that. If we divide $487 million by $887 million in revenue, the FCF margin was an astounding 54.9%. That means that 55 cents of every dollar went straight to increasing the company’s cash balance after all cash costs were taken out. The company makes this very clear on page 29 of its Q1 10-Q filing.
Moreover, the company produced negative $585 million in FCF last year. Airbnb has really cleaned up its cost structure since then. In fact, even in Q4, FCF was negative $147 million even though sales were only 3.25% lower than in Q1. This trend can be seen on page 22 of the shareholder letter.
One explanation for the sudden increase is seasonal travel. On page 15, the letter stated:
“Due to seasonal patterns, we typically experience an increase in unearned fees in the first two quarters of the year, which favorably impacts our cash from operations. Free Cash Flow as a percentage of revenue tends to be highest during this period.”
This pattern can help us estimate FCF. We will not use the 54.9% FCF margin from Q1. I used a 20% margin estimate in my last article, but I suspect it would be okay to use a 40% FCF margin now.
According to Seeking Alpha, the 2022 sales estimate is now $6.94 billion, up from $6.48 billion in May. Multiplying $6.94 billion by 40% gives us a $2.776 FCF estimate for 2022. We can use this to determine the value of the company’s stock.
Estimating the Value of ABNB Stock
At $149.67 per share as of June 25, ABNB stock has a market capitalization of $91.05 billion. This is well below the future value estimate of ABNB stock using an FCF yield analysis.
For example, in my last article, I wrote that we could use a 1% FCF yield to value the stock. Therefore, if we divide the $2.776 billion FCF estimate for 2022 by 1%, we get a value of $277.6 billion. That is 305% times today’s $91.05 billion market value, implying a potential gain of 205% in ABNB stock. That would give it a target value of $456.32 per share.
Even if we used a more conservative estimate with a 1.5% FCF yield, the target value is $185 billion (i.e., $2.776 billion/0.015 = $185.06 billion.) This implies a potential gain of 103.26% and a potential price target of $304.22.
What To Do With ABNB Stock
I now feel much more confident in ABNB stock’s potential. For example, even with a lower 30% FCF margin estimate, FCF will be $2.082 billion. This is still significantly higher than my estimate of $1.32 billion in FCF last month.
So for example, using a 1.5% FCF yield, the market value would be $138.8 billion, or 52.44% higher. That implies a price of $228 per share, 52.4 above today’s price.
Based on Airbnb’s ability to generate powerful free cash flow going forward, ABNB stock could be worth between 50% to 100% more.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.