Airbnb, Inc. (ABNB) stock still looks cheap here, despite dropping over 7% along with the market in the last month. Based on its strong FCF it could be worth well over $200 per share. That is good for short-sellers of OTM puts.

On March 18 ABNB stock was at $168.18 and today it's at $156.13, a $12.05 or 7.1% tumble. However, based on the stock's strong free cash flow (FCF) generation, it could be worth well over $200 per share.

I discussed this situation in my last Barchart article on March 24, “Airbnb's Massive FCF Could Make ABNB Worth 26% More at $211 Per Share.” At the time, I argued that ABNB stock was worth over $211 per share (ABNB was at $167.87 then) and suggested selling short the $160 strike price put option expiring April 12.

As it turned out, ABNB closed at $159.27, so anyone taking that advice would have seen their short put options exercised. That means the cash they secured was used to buy 100 shares at $165. This means they may have an unrealized capital loss now of -$3.87 per share held.

How to Make Money With OTM Calls and Puts

But don't forget, the investor would have also received $1.66 from the short put sale. That means the unrealized loss is now only $2.21 before commissions. In other words, their break-even cost is only $158.34.

The investor can continue to hold these shares and wait for ABNB stock to rise. But they could also now sell covered calls. For example, look at the May 3 expiration period, 17 days from today. 

It shows that the $165 call options that expire on May 3 trade for $2.22 on the bid side. That more than covers the $2.21 net loss from the prior short put sale. Moreover, even if ABNB stock rises to $165 from here and the covered calls are exercised, the investor makes a capital gain of $5.00 (i.e., $165-$160 buy-in) or 3.125%.

Moreover, now that the investor has 100 shares they can decide to use the margin from those shares along with cash to short more out-of-the-money puts.

For example, the $145 strike price puts trade for $1.37 on the bid side. That means the short seller of these puts can make almost a 1% yield (i.e., $1.37/$145.00 = 0.945%). However, the investor will have to secure $14,500 in cash and/or margin to make $137. (But some of this requirement might be available from owning 100 shares of ABNB shares).

In fact, the investor might be willing to take on more assignment risk here, given that the stock is so cheap. For example, the $147.00 strike price puts expiring May 3 trade for $1.77. That provides an immediate 1.20% yield (i.e., $177/$147.00). The investor would only have to secure $200 more (i.e., $14,700), for a $177 return, $40 more. 

Moreover, over 90 days, if repeated, this works out to a 4,82% expected return, i.e., $708 on the $14,700 investment.

The bottom line is that the investor has a chance to make money despite the unrealized loss. After all ABNB stock still looks very cheap here.

Price Targets for ABNB Stock

Analysts (31) surveyed by Refinitv (as seen in Yahoo! Finance's summary page) have an average price target of $148.88 per share, i.e., lower than today's price. However, AnaChart, a new more precise sell-side analyst recommendation tracking service says that its survey of 37 analysts has an average price target of $159.27. (AnaChart also now has a new insider buying and selling tracking section on stocks).

My analysis of the stock is simple. Analysts' revenue forecasts are between $11.1 billion and $12.4 billion over the next 12 months (NTM), or $11.75 billion.  Using a 40% FCF margin (it generated 38.7% FCF margins last quarter), Airbnb could make $4.7 billion in FCF. Even using a 38.7% margin, its FCF would be $4.55 billion in NTM FCF.

Therefore, using a 3.5% FCF yield metric, the stock could be worth between $130 billion (i.e., $4.55b/.035) and $134.3 billion. That is between 30.5% and 34.8% higher than today's $99.6 billion market cap. In other words, ABNB stock is worth about a third more than today's price of $156.19, or $207.73, well over $200 per share.

The bottom line is that it makes to buy and hold ABNB stock here and also sell out-of-the-money puts and calls.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.