Airbnb (NASDAQ:ABNB) has demonstrated strong performance in its Q2 free cash flow (FCF), maintaining a robust trailing 12-month FCF margin of 43% of revenue. This positive financial position suggests favorable prospects for Airbnb stock, which is currently trading at $138.19 as of August 8. This article delves into the implications of Airbnb’s FCF margins and explores potentially profitable options plays based on this financial strength.
Strong Q2 Free Cash Flow
In its recent report on August 3, Airbnb disclosed that its Q2 free cash flow remained impressive. The company’s trailing 12-month FCF margin remained resilient at 43% of revenue. This is a key indicator of financial health and efficiency, reflecting the portion of revenue that turns into free cash flow after accounting for expenses.
Upside Potential for Airbnb Stock
Given Airbnb’s strong financial standing, there’s the potential for upward movement in ABNB stock. This is particularly evident in the Q2 shareholder letter, where Airbnb reported $900 million in Q2 free cash flow. This marked a 13% increase compared to the previous year’s $796 million, although it declined from the $1.6 billion FCF in Q1.
Steady FCF Margins
The robustness of Airbnb’s FCF margins is an essential factor in its positive outlook. By analyzing the Q2 shareholder letter, we can observe that the company’s trailing 12-month FCF margins have even risen. The average FCF margin over the last year during Q2 was 43%, up from 39% a year ago. This growth in FCF margins is attributed to revenue and bookings growth, as well as net margin expansion.
Calculating a Price Target
Using Airbnb’s FCF margin to predict future revenue forecasts, we can set a price target for ABNB stock. Analysts forecast revenue of $9.84 billion for 2023 and $11.06 billion for 2024. This averages $10.45 billion in sales over the next 12 months. Applying the average TTM FCF margin of 43% to this forecasted sales figure, we estimate $4.5 billion in projected FCF for the next year.
If we consider a 4.0% FCF yield (equivalent to a 25x FCF multiple), Airbnb’s potential market capitalization could reach $112.5 billion ($4.5b x 25). Similarly, a 3.33% FCF yield (equivalent to a 30x FCF multiple) would suggest a market cap of $135 billion. With a current market cap of $90.3 billion, this implies a potential increase of 24.6% to 49.5% for ABNB stock, indicating a price range of $172.18 to $206.59 per share.
Profitable Options Play
Investors can leverage options to capitalize on ABNB stock’s potential upside. Selling short-put options with attractive premiums has proven to be a profitable strategy. For instance, selling short put options expiring on September 1, 2023, at the $135 strike price can yield $2.26 per contract. This implies a healthy yield of 1.67% within slightly over three weeks until expiration.
By repeating this strategy every three weeks, investors could potentially achieve an annualized return of 28.4%.
Conclusion
Airbnb’s strong FCF margins offer a promising outlook for Airbnb stock. The company’s financial strength and consistent performance can translate into positive market movements. By considering calculated price targets and exploring options strategies, investors have opportunities to make profitable decisions while capitalizing on the potential upside in ABNB stock. Beyond Meat stock has dropped by 2% year-to-date.
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