Share travel booking platform prices Airbnb (ABNB 0.93%) are down more than 50% from their record level reached more than a year ago.
Some institutional investors expect Airbnb to be a game changer in the next four years. Specifically, this “smart money” estimates that Airbnb stock may exceed $288.64 per share, which is more than 180% upside from where it currently trades. But here’s why smart money could be a mistake.
First, why $288.64 per share?
On March 2, 2021, Airbnb announced that it was seeking to raise $2 billion. Two days later, it priced the convertible senior notes at 0% interest with a conversion price of $288.64 per share.
In other words, Airbnb’s lenders don’t earn interest on a $2 billion loan. Instead, they have the option to convert that loan into $2 billion worth of Airbnb stock if the price is above $288.64 by December 2025 through March 2026, when the notes will mature.
Prior to the current market downturn, the popularity of 0% convertible senior notes had surged. As reported by The Wall Street Journal, JPMorgan Chase data shows the companies sold a record $57 billion of these zero-coupon notes in 2020 and 2021 combined. Companies like Affirm Assets, Instantaneousand Interactive Platoon all got in on the action with Airbnb.
This type of debt product box be win-win. For example, let’s say Airbnb stock goes to $350 per share. If he hits that price, it’s probably because he used the $2 billion to significantly expand his business. Therefore, it’s a win for Airbnb. Additionally, if it hits $350 per share, the company’s lenders can convert at $288.64 and instantly realize over $60 per share in profit. Therefore, it’s a win for the smart money.
However, if Airbnb stock does not reach the conversion price, that $2 billion loan must be repaid.
For businesses that are cash-intensive and have poor balance sheets, paying down interest-free debt could be problematic. They’ll be forced to pay off old debt with new debt that’s more expensive because rates have skyrocketed in 2022. Luckily for Airbnb, it’s cash flow positive and it has over $8 billion in cash, cash equivalents and marketable securities from the end of the first quarter of 2022. Therefore, its debt is manageable.
Can Airbnb’s stock really skyrocket in the next four years?
You might be wondering why Smart Money made such a bold bet on Airbnb stock. Well, it wasn’t so daring back then. Airbnb shares were trading around $180 per share when the terms of the loan were set. As a result, lenders were only looking for a 60% gain over five years, or about 10% compounded annually. And over the long history of the stock market, 10% annual returns are pretty average.
There are good reasons to believe that Airbnb’s business may have above– average performance. Consider that in the first quarter, more than 100 million nights and experiences were booked on the Airbnb platform, up 26% from the pre-pandemic period of the same quarter three years ago. In comparison, the gross value of reservations increased by 73% during this period.
Growth in booking value outpaces overall transaction growth, as people pay more on average per Airbnb booking. And the implications of this trend are profound. Increasingly, consumers see Airbnb as a premium experience worth spending more money on. It’s big.
There is more I could add to my bullish outlook. But in short, Airbnb is a premium brand in a growing space. Therefore, I expect his business to do well. That said, it still might not hit 180% upside in the next four years because of its valuation, not the company.
Since March 2021, Airbnb multiple price/sales (P/S) dipped from around 30 to around 10. This tends to happen when interest rates rise the way they have. But there is no way to predict interest rates in 2025. Therefore, speculating on Airbnb’s valuation in 2025 is difficult.
ABNB PS Ratio given by Y-Charts
With more than 635 million shares currently, Airbnb market capitalization would be over $180 billion in 2025 if it reached $288 per share. Assuming the stock maintains a P/S of 10, it should generate $18 billion in annual revenue by then, triple the $6 billion it generated in 2021. That seems like a small amount to me. likely.
Airbnb will announce its financial results for the second quarter of 2022 on Tuesday, August 2, by which time it expects to post year-over-year revenue growth of more than 50%. If he can sustain this meteoric growth over the next four years, then perhaps he can effectively triple his revenue and hit his $2 billion debt conversion price.
However, even if it doesn’t, I still expect Airbnb to grow enough to be a market-beating player from here. And that’s what matters most to investors.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Jon Quast holds positions at Airbnb, Inc. and Peloton Interactive. The Motley Fool holds posts and endorses Affirm Holdings, Inc., Airbnb, Inc., and Peloton Interactive. The Motley Fool has a disclosure policy.
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