What happened
Vacation Rental Platform Actions Airbnb (ABNB -2.34%) fell 4.6% at 1:35 p.m. ET Thursday after not one but two separate analysts decided to cut their price targets on the stock.
First Citigroup reduced its estimated Airbnb valuation from $200 to $160 today. Then, less than an hour later, Truist To cut his target price of $160 at only $120 per share.
So what
Granted, Airbnb stock is only around $91 and changing right now, so even a $120 price target implies over 31% upside in stock. Nonetheless, Truist only rates Airbnb as a hold on fears that second-quarter results — due for release on August 10 — could disappoint, as a strong US dollar means profits made outside the US will have less in value when translated into US Dollars for inclusion in the income statement. Further, analysts warn that if a recession happens, it could hurt travel demand, adding future weak sales to worries about Airbnb’s earnings.
Citigroup also cut its price target on Airbnb, with its analyst a little less optimistic about the stock’s chances. As The Fly reports today, like Truist, Citi sees the potential for exchange rates and an economic downturn to hurt Airbnb’s business. However, with its price target of $160 implying the stock is more than 40% undervalued, Citi believes long-term investors can still turn a net profit by sitting tight and weathering the volatility. .
Now what
I have to admit, I’m more inclined to side with Citi than Truist on this one.
Consider: After a long pandemic, Airbnb finally returned to profitability in the second half of last year, making some $888 million in profit, according to data from S&P Global Market Intelligence. The company is even more profitable when it is valued free movement of capital (FCF), which was $2.8 billion generated in the last 12 months.
With a current enterprise value of just $54 billion, that means the travel leader is likely selling today for an enterprise value to FCF ratio of less than 20 – 19.3 to be exact. And whatever happens in the short term, analysts still expect Airbnb to grow earnings by nearly 19% annually over the next five years.
I don’t know about you, but to me it seems very close to a reasonable price. In fact, paying 19.3 times FCF for a 19% producer could even be a favorable price.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in the stocks mentioned. The Motley Fool holds posts and recommends Airbnb, Inc. The Motley Fool has a disclosure policy.
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