As I write this, Airbnb (NASDAQ:ABNB) is up 7.6% in 2021. That’s the good news. The bad news is that ABNB stock was trading around $220 in mid-February. It’s down more than 30% since.
Can it get back to its 52-week high of $219.94? That’s going to be tough. Here’s why.
The Last Time I Wrote About ABNB Stock
My most recent commentary about Airbnb appeared on the final day of 2020. At the time, I wondered if ABNB was a $68 stock or a $232 stock.
For reference, $68 is the company’s IPO price from earlier in December. As for the $232 reference, I merely added the $82 its share price had gained from its IPO on Dec. 9 to the $150 share price it was trading when I wrote my article that appeared at the end of December.
I concluded that I wouldn’t buy it at $150. I also suggested that anyone that did buy it should keep a little cash to buy more at a lower price. Ultimately, I felt $232 could be reached within 3-5 years.
So, let’s consider these statements.
I Wouldn’t Buy at $150
Even though I said I wouldn’t buy, I didn’t say readers shouldn’t. If you ignored my view on the subject, you were up 47% in six weeks. Of course, to realize those gains, you would have had to have been the biggest market timer of all time. It proceeded to fall more than 40% over the next three months to $129.71, its lowest level in 2021.
I basically argued at the time that Airbnb was overvalued at $150.
“It’s not going to be easy for the company’s stock to move beyond $150. Trading at 21.6 times sales – BKNG is trading at 10.2 times sales – it’s already getting a nosebleed valuation,” I wrote on Dec. 31, 2020.
“Were investors to give Airbnb the same valuation as Booking, it would mean an immediate 50% cut in its share price. I don’t think that’s going to happen, but it could.”
Well, it never fell as low as $75. Today, its market capitalization of $90.9 billion is $1.35 billion less than Booking Holdings (NASDAQ:BKNG). BKNG trades at 16.5x sales, almost 40% less than Airbnb’s price-to-sales ratio of 27.0.
So, over the first six months of 2021, Booking’s P/S multiple has increased by 60%, compared to a 25% gain for ABNB.
To get my vote of confidence, I said that Airbnb would have to deliver positive free cash flow (FCF) in 2021. In Q1 2021, its strongest quarter from a cash flow perspective, it generated $487 million, 183% higher than -$585 million FCF in Q1 2020.
More importantly, over the trailing 12 months, it’s generated $405 million in positive FCF. It’s on course to generate its highest annual FCF in its history.
So, from that perspective, its $150 share price today is probably a better buy than in December.
Cash for a Rainy Day
As I said earlier, you could have bought ABNB stock for under $130 in May. If it puts up strong FCF numbers when it reports Q2 2021 results in August, it’s almost certain to push higher.
I wouldn’t hazard a guess, though, as to how much higher.
So, how does it get to $220?
Well, as I said, it’s got to deliver positive FCF in 2021. As we sit here today, Airbnb has an FCF yield of 0.4% [$405M divided by $90.9B]. That’s pretty darn low. On the flip side, Booking Holdings has FCF of -$10.0 million for the trailing 12 months, so from that perspective, ABNB is doing alright.
If it were to get to $220 by the end of 2021, it would have a market cap of $135.9 billion [based on 617.5 million shares O/S]. I would think if it delivered a 1% FCF yield by then — TTM FCF of $1.36 billion — it would definitely have a shot.
The difference-maker won’t be its second-quarter results. It will be the third and fourth quarters, which are traditionally the busiest for travel. If those produce nice post-pandemic bumps in bookings, it could happen.
Given the potential opportunity that lies ahead of it in 2021 and 2022, I like ABNB at $150 a lot more than I did in December. And, heck, you might even get lucky, and it jumps all the way to $220.
One can only hope.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.