Airbnb, Inc.’s (NASDAQ:ABNB) intrinsic value is potentially 41% higher than its stock price
Today, we’ll walk through one way to estimate the intrinsic value of Airbnb, Inc. (NASDAQ: ABNB) by estimating the company’s future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. There really isn’t much to do, although it may seem quite complex.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
See our latest analysis for Airbnb
The method
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
Estimated free cash flow (FCF) over 10 years
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF ($, millions) | US$2.21 billion | $2.70 billion | $3.67 billion | $4.72 billion | $5.84 billion | $6.68 billion | US$7.39 billion | $7.98 billion | $8.47 billion | $8.88 billion |
Growth rate estimate Source | Analyst x9 | Analyst x10 | Analyst x8 | Analyst x6 | Analyst x6 | Is at 14.29% | Is at 10.58% | Is 7.98% | Is at 6.16% | Is at 4.89% |
Present value (millions of dollars) discounted at 6.6% | $2,100 | $2,400 | $3,000 | $3.7,000 | $4,200 | $4,600 | $4.7,000 | $4.8,000 | $4.8,000 | $4.7,000 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $39 billion
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.6%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = $8.9 billion × (1 + 1.9%) ÷ (6.6%–1.9%) = $193 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $193 billion ÷ (1 + 6.6%)^{ten}= $102 billion
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $141 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of US$158, the company looks slightly undervalued at a 29% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Airbnb as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which factors in debt. In this calculation, we used 6.6%, which is based on a leveraged beta of 1.103. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Can we understand why the company is trading at a discount to its intrinsic value? For Airbnb, we’ve compiled three more things you should explore:
- Risks: For example, we have identified 2 warning signs for Airbnb of which you should be aware.
- Management: Did insiders increase their shares to take advantage of market sentiment about ABNB’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs a daily updated cash flow assessment for each NASDAQGS stock. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.