It’s been a few weeks since Airbnb (NASDAQ: ABNB) went public at $68 a share. Since then, Airbnb stock has jumped to $150, most of those gains coming on its first day of trading.
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The short-term stay platform sold $3.74 billion in gross proceeds in its initial public offering. Theoretically, it could have raised double that amount.
So, the question I’m pondering is whether ABNB is a $68 stock or is it a $232 stock?
Airbnb Stock Is Worth $232
First of all, for those wondering how I came up with a $232 share price, it’s merely $82 on top of $150, the price it is trading at as I write this. The $82 is derived from $150 less $68. No real mathematical genius here.
Anyway, in what has to be one of the most anticipated IPOs of the past half-decade or so, Airbnb finally pulled the trigger in the middle of a pandemic, no less. Ballsy, I’ll give it that.
So, to say it’s worth $232 is to assume it’s worth 3.5 times its IPO price, which means either the underwriters were incredibly wrong about the platform’s true value out of the gate, or this was a ruse to build pent-up demand for its stock.
We won’t know the answer to that for several quarters, if not years. In the meantime, let’s consider how it gets to $232 in short order.
First of all, it’s important to note that Airbnb made a profit of $219.3 million in the third quarter ended Sept. 30, the first profit since Q3 2019, and only the fourth out of the last 11 quarters.
However, before you get too excited, it made $266.7 million in the same period last year, the company’s busiest quarter of the year. If you go back to 2017, you’ll see that the third quarter saw the most quarterly nights and experiences booked (page 136 of prospectus) that year, as did 2018, 2019, and so far, it’s holding up in 2020.
The good news about this is that it shows the power of the platform even during a pandemic. Not perfect, but better than many others in the overnight hospitality industry experienced.
Forget profits for now.
ABNB Is Only Worth $68
Airbnb has lost an average of $209 million per year over the past five. That said, it really started to scale the business in 2019, which led to almost 70% of its losses over the past five years. In 2018, operating expenses accounted for 99.5% of its $3.65 billion in revenue. A year later, operating expenses accounted for 110.4% of its $4.81 billion in revenue.
A real positive from where I sit is that it generated positive annual free cash flow in all four years between 2016 and 2019. And although it’s too far in the hole in 2020, it demonstrates the company’s ability to throw off free cash, which means as it grows the top line in the future, it’s going to have a relatively easy time paying down its $2 billion in debt.
Booking Holdings (NASDAQ: BKNG) has the same $90 billion market cap as Airbnb at the moment. It has a trailing 12-month free cash flow of $1,43 billion on $8.9 billion in sales for an FCF margin of 16%. Based on an enterprise value of $90.5 billion, it’s trading at 63 times FCF. That’s up considerably from 2019 when it traded at approximately 19 times FCF.
So, if you take Airbnb’s best year for FCF – in 2018, it had FCF of $505 million or 14% of revenue – and multiplied it by 63, you’d get an enterprise value of $32 billion, or one-third its current level.
However, were its revenue to grow by 30% a year over the next five and 15% over the five years thereafter, it would have approximately $35.9 billion in revenue at the end of 2029. Based on a 14% FCF margin, you get $5 billion in future free cash.
Multiply by 63, and you get an enterprise value of $315 billion. Multiply by 19, and you get $95 billion. Based on 602.5 million shares, you get an enterprise value per share of $523 on the high side and $158 on the low side.
So, ABNB may be worth $232, but to get there in 2021 or 2022, it’s got to find a pathway to profitability.
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.
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.
Heading into 2021, I believe Airbnb has to get back to positive free cash flow if it wants to maintain investor interest. After all, from Q4 2018 through Q4 2019, it had a positive TTM FCF. In the first three quarters of 2020, that’s turned negative.
Again, I don’t think it’s enough to pull its share price down to IPO levels, but it’s something to look out for in the next two or three quarters.
The Bottom Line
Normally, it’s easy to say yay or nay to owning a particular stock at a certain share price. In the case of Airbnb stock, I find it far more difficult a task. After all, it’s created an entire industry out of people renting out their homes and apartments. This is not going to go away.
I probably wouldn’t buy it at $150 a share, but that doesn’t mean you shouldn’t. If you do buy in the near term, I suggest you keep some cash to buy more at a lower price.
Long term, if you hold for three to five years, you’ll probably see $232, but you’ve got to be patient. We’re still in the middle of a pandemic.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.