Airbnb (NASDAQ:ABNB) is likely to report a huge gain in earnings and free cash flow (FCF) for the second quarter when it reports, which will likely happen in mid-August. This could end up pushing ABNB stock significantly higher than its close yesterday of $142. Investors will realize that Airbnb, the online travel hosting company, is a real FCF powerhouse and assign it a much higher valuation metric.
I have been saying this for a while now. In my last article, I showed how ABNB stock could be worth between 50% and 100% higher based on its power FCF. This was based on the fact that the company posted a massive 54.9% FCF margin last quarter. That is incredibly high. Most companies are lucky to post a 10% to 20% FCF margin.
Estimating the Value of ABNB Stock
I made my estimates using a lower FCF estimate. My initial target price was $304.22 based on a 40% FCF margin on 2022 sales estimates of $6.94 billion. This resulted in an FCF estimate of $2.776 billion. I divided that number by 1.5% to derive a FCF yield estimate of $185.07 billion, or $304.22 per share.
However, since then, analysts surveyed by Seeking Alpha have raised their average revenue estimate for 2022 to $7 billion. With a 40% FCF margin, that brings its FCF estimate to $2.8 billion.
Moreover, using a 1.5% FCF yield, the target market cap for ABNB is $186.67 billion. That is 112.9% higher than Monday evening’s market cap of $87.688 billion, according to Yahoo! Finance. This puts its per-share value at $302.31 (i.e., 2.129 x $142).
Even using a 30% FCF margin, this puts its FCF estimate at $2.1 billion. Using a 1.5% FCF yield forecast, the target market value is $140 billion. That is 59.7% higher than its present market value and implies that its value is $226.77 per share.
In other words, ABNB stock’s target value is 60% to 113% higher than today’s value. It could also be much higher if the company comes out with even higher FCF for its Q2 figures.
What Analysts Say
Recently BTIG upgraded Airbnb stock, as it is “better situated than peers to ride out the pandemic uncertainty.” He also argued that “alternative accommodations have gone mainstream with online penetration pushing towards ~30% over the next several years.” This is based on an assessment of the BTIG report by Seeking Alpha.
According to Barron’s, the analyst, Jake Fuller, raised his price target to $170 per share. That represents a potential 20% gain in ABNB stock. However, TipRanks.com reports that the average price target of 26 analysts who’ve written on the stock in the last three months is $173.17. That represents a potential upside of 22% in the stock price.
So, yes, my target prices are well over the present price. However, remember that my estimate is based on 2022 estimates. It may take over a year for the stock to rise by 60% to 113%. However, I do believe that once the market realizes how powerful its FCF really is, the price will move closer to my target prices.
What to Do With ABNB Stock
Typically, when I see that my target price is much higher than Wall Street analysts’ target price, I use a probability matrix. For example, let’s say that there is a 40% chance I am right and ABNB stock will rise about 86.5% over the next year (average of both of my estimates).
In the second scenario let’s say there is a 40% probability that analysts are right and the stock will right 22%. Lastly, let’s assume there is a remaining 20% chance that ABNB will make a market return of 10%.
Here is how that works out. The first scenario results in an expected return (ER) of 34.6% (i.e., 40% x 86.5% = 34.6%). The second scenario with analysts’ targets results in an ER of 8.8% (i.e., 40% x 22%). The last scenario has an ER of 2% (i.e., 20% x 10%).
Therefore, the total ER with ABNB stock is 45.4% (i.e., 34.6% + 8.8% +2%). That puts its value at $206.47. Moreover, using my lower price target of 60% results in an ER of 34.8% (i.e., 60% x 40%, or 24%, plus 8.8% plus 2.0%). That sets its price target at $191.42 per share.
This shows that my lowest estimate for ABNB stock is 35% higher at $191.42 per share.
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.