Airbnb (NASDAQ:ABNB) reported a blowout Q2 on Aug. 12. This may not be apparent at first since the travel booking company’s net income loss was $68 million on $1.335 million in sales. But its free cash flow results were simply amazing. As a result, I estimate that ABNB stock could be worth as much as 43.5% more at $249 per share.
This is even higher than my previous estimate of $226.77 per share in my last article as of July 27. At that time, ABNB stock was at $142 as of July 26. Since then, the stock has risen to $173.58 on Oct. 12. That is already a gain of $31.58, or 22.2%.
Moreover, it is already up significantly since its most recent trough on July 19 when ABNB stock bottomed out at $131.88. That means it’s already up 31.6% from its recent floor price. However, as I indicated, it still looks like ABNB could be worth at least 43.5% more. This article will show how I came up with that estimate.
Where Things Stand With Airbnb
Airbnb reported that sales were up 320% year-over-year (YoY), but over two years revenue was up 10% from Q2 in 2019. Moreover, the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) turned positive and rose to $217 million during Q2. This was after posting EBITDA losses in the past 2 quarters.
Airbnb reports that this upturn in its revenue and EBITDA was due to the worldwide travel rebound during Q2:
“With more people vaccinated and certain travel restrictions lifted, global demand and supply increased in Q2, driving up revenue even higher than comparable 2019 levels.“
Free Cash Flow Performance
But more importantly, Airbnb also reported that its free cash flow (FCF) hit an amazingly high level of $784 million. This is the highest amount of FCF the company has ever made, including compared to Q1 when it made $487 million. This history can be seen at the bottom of page 21 of Airbnb’s shareholder letter.
In fact, given that Q2 revenue was $1.335 billion during Q2, this means that the Q2 FCF margin was very high at 58.7% (i.e., $784 m/$1,335m). That exceeded the Q1 FCF margin of 54.9% as can be seen on page 21 of the letter.
You may recall that last quarter I wrote that this might not be sustainable. I suspected that it was due to one-time working capital changes. However, now Airbnb reports that its Q2 FCF margins were high for two reasons:
“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.“
The problem is this is exactly what they said last quarter, and now FCF has skyrocketed once again. So the test will be if FCF again stays high during Q3. We will see on about Nov. 12 when those results come out.
In the meantime, I looked at Seeking Alpha‘s historical measurement of Airbnb’s FCF for the past 12 months. On its trailing 12 month (TTM) tab, Seeking Alpha shows that Airbnb produced $1.482 billion in operating cash flow and had just $30.9 million in capex spending.
Therefore, in the TTM period to June 30, FCF was $1.451 billion. Given that TTM revenue was $4.424 billion, this means that the TTM FCF margin was 32.8%. We can use this to estimate the value of ABNB stock.
What ABNB Stock Is Worth
Analysts now estimate that Airbnb will produce $7.16 billion in revenue by the end of 2022. So applying a 32.8% FCF margin implies that free cash flow could reach $2.348 billion.
As I wrote last time, we can use a 1.5% FCF yield to forecast the value of ABNB stock. This works out to a market value of $156.56 billion (i.e., $2.348 billion / 0.015 = $156.56b).
This $156.5 billion target market value is about 43.45% over today’s market value of $109.12 billion, according to Yahoo! Finance. So 143.45% of today’s price of $173.58 works out to a target price of $249.00 per share.
Therefore, growth and value investors can be reasonably assured that the company has plenty of value in its upside. In fact, if the FCF margins come in anywhere close to the 58.7% in Q2 and 55.7% in Q1, expect to see ABNB stock fly even higher than my $249 price target.
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.