Airbnb's Massive Free Cash Flow and FCF Margins Could Push ABNB Stock Higher

On Nov. 7, Airbnb Inc. (ABNB) reported making $4.1 billion in free cash flow (FCF) in the last 12 months ending Q3, which was 38% of revenue. This high FCF margin, if sustained, could push ABNB stock up by 33% to $181 p/sh over the next year.

ABNB is at $135.55 in early trading on Nov. 11 after falling 8.66% on Friday, Nov. 8. This seems to be a case of “sell on the news,” and completely undeserved. As analysts and the investing public digest Airbnb's very profitable quarterly results, ABNB could float back up.

Airbnb's Q3 report shows that it generates large amounts of free cash flow (FCF) and is not shy about reporting this. Airbnb is one of the few companies that report quarterly and trailing 12-month (TTM) FCF margins.

FCF Prospects

For example, the quarterly report indicated that the company's $1.1 billion in FCF represented 29% of its quarterly $3.7 billion in sales. Although this was lower than last year's $1.3 billion in FCF, it was caused by a one-time IRS $163 million payment. As a result, on an adjusted basis, the adj. FCF was $1.267b or 34.2% of sales.

That is a very high FCF margin, implying that well over a third of all sales goes straight into the company's bank account, i.e., cash flow that is “free” of any further obligations. In fact, its TTM FCF was $4.1 billion, for a TTM FCF margin of 38%, as seen in the table below.

The market may have reacted to the lower YoY TTM FCF margins as seen on page 15 of its shareholder letter. For example, last year the company made 41% FCF margins.

But that seems to be missing the main point. These are very high FCF margins, especially if the company can sustain them.

In that regard, management indicated that it expects to be able to do this. For example, here is what the “Outlook” section of the letter said:

“For the full-year 2024, we now expect to deliver an Adjusted EBITDA Margin of approximately 35.5%. In addition, we expect to deliver a full-year 2024 Free Cash Flow Margin several points above our Adjusted EBITDA Margin.”

In other words, expect its 2024 FCF margin to be 35.5% plus “several points.” That implies it will be around 38%. So, using analysts' forecasts of $11.05 billion in revenue for 2024, we can forecast $4.2 billion in FCF for 2024 (i.e., $11.05b x 0.38 = $4.2b).

Moreover, the 2024 revenue forecast is for $12.2 billion, up +10.4% over 2024. That implies that 2025 FCF could rise to $4.65 billion, and if margins rise to 40% due to operating leverage, FCF could hit $4.9 billion. This has huge implications for the value of ABNB stock going forward.

Target Price for ABNB Stock

Let's assume that Airbnb makes $4.775 billion in FCF next year. Using an FCF yield metric, we can forecast its market cap in the next 12 months (NTM). 

For example, Airbnb presently has a market cap of $84.1 billion. Its TTM FCF of $4.1 billion represents 4.875% of the amount - i.e., a FCF yield of 4.875%.

So if we assume that the FCF yield will improve slightly to 4.25% over the next year, the projected $4.775 billion in FCF in 2025 could result in a market cap of $112.4 billion (i.e., $4.775b/0.0425 = $112.4b).

In other words, the market cap will rise by a third from $84.1 billion to $112.4b (i.e., $112.3/84.1b-1 = +33.7%). This implies that the NTM target price is $181 per share (i.e., $135.55 x 1.337 = $181.23).

Analysts tend to agree that ABNB stock is undervalued. For example, AnaChart's survey shows analysts' mean target price is $141.67.

One way to play this is to sell short out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

This play allows investors to set a lower potential buy-in target price and get paid to wait for this to possibly happen. For example, look at the Dec. 6 expiration period, 25 days from now.

The premium for the $132.00 put options is trading for $1.37 per put option contract on the bid side. That represents a put yield of 1.04% to the short-seller of these puts over the next three weeks.

This strike price is less than 3% below the trading price, providing some downside protection. For example, if ABNB falls to $132 from today's price, the breakeven price for the short seller is actually $132- $1.37, or $130.63 per share. That's 4.7% below today's price, a good deal below.

Moreover, note that the delta ratio is only 32%. That roughly implies that there is only a one-third chance that over the next 3 weeks, ABNB stock will fall to the strike price. In other words, this might be a good way to generate some extra income without having to worry too much about getting assigned.

This also implies that if ABNB stock stays flat the investor can make good money over the next three months. The expected return (ER) is about 5.0% (i.e. 120/25 x 1.04% = 4.8 x 1.04% =5.0%).

Moreover, if the investor buys ABNB and holds it for the next 12 months and also shorts OTM puts, they can enhance their return by gaining income and the upside in ABNB stock.

The bottom line is that ABNB looks cheap here given its huge FCF margins.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.