First we put Airbnb (NASDAQ: ABNB) in the danger zone in February 2021. Since then, the stock has fallen 31%, compared to an 8% gain for the S&P 500. Although the company has set records for many of its performances In 2021, the likelihood of the company hitting projected cash flow expectations in the stock price remains very low.

Airbnb’s stock could fall further based on:

• Cash burn continues despite revenue growth
• The expected decline in the average daily rate (ADR) will put pressure on margins
• Forecasts for 2022 imply a pullback from 2021, but the stock price is the opposite
• The stock’s current valuation implies that Airbnb will be larger than Booking (BKNG), Expedia (EXPE), Trip.com (TCOM) and Tripadvisor (TRIP) combined. Anything less and the stock could be down more than 72%

Figure 1: 39% outperformance in the danger zone: 2/10/21 to 3/11/22

What works

Record main metrics: In 2021, Airbnb posted record results in its key metrics as consumers started traveling again after 2020 pandemic-related lockdowns kept most at home. Specifically, (each digit from year to year [YoY]):

• Nights and experiences booked increased by 56% in 2021
• Gross booking value (GBV) increased by 96% in 2021
• Revenue increased by 77% in 2021
• The average daily rate (ADR) increased by 20% in 4Q21
• Adjusted EBITDA (although not a reliable measure of earnings) was positive $1.6 billion, compared to -$251 million in 2020 and -$253 million in 2019

Controlled expenses: Airbnb laid off 25% of its workforce in 2020 and the resulting cost savings were sustained through 2021. As a result, Airbnb achieved its first positive net operating profit after tax (NOPAT) margin since its Initial Public Offering. However, based on management guidance, we do not expect further margin improvement in 2022.

Othe hat does not work

Always burning money: Despite a decline in operating expenses as a percentage of revenue in 2021 (compared to 2019 and 2020), Airbnb still burned $1.6 billion in free cash flow in 2021. Over the past three years , Airbnb burned a total of $10.4 billion in FCF.

Figure 2: Airbnb Cumulative Free Cash Flow: 2019-2021

The positive conditions of 2021 are unlikely to be repeated: For investors hoping for another year like last for Airbnb, we and management recommend pumping the brakes. In its 2022 guidance, management not only emphasized that “multi-quarter forecasting remains challenging given continued COVID-related uncertainties,” but also recommended pegging 2022 growth to 2019, rather than 2021. In other words, 2021 has been exceptional.

First, consumers delayed travel to early 2021, leading to abnormally high bookings in the second quarter. Going forward, management expects a return to historical seasonality, which means more volatility in Airbnb’s earnings, and chances for gains are missing in the future.

Second, Airbnb benefited from more bookings in North America, which management says has a higher ADR than other geographies. In 2022, management expects ADR to fall from 2021 levels as international travel returns and Asia-Pacific removes some of the strictest COVID-19 restrictions.

Although not a reliable measure of earnings, we can still derive valuable insight from management’s advice for the direction of Adjusted EBITDA. Given the expected decline in ADR mentioned above, management expects the Adjusted EBITDA margin to be in line with 2021. In other words, do not expect an improvement in the profitability in 2022.

Slowing growth in itself is not a problem if the stock price is priced accordingly. However, Airbnb’s valuation, even after falling, does not reflect stagnating profitability and slowing growth. Details below.

Airbnb still at the cost of being the biggest accommodation company

Although ABNB has fallen 33% since its 52-week high, the stock is still significantly overvalued. Below, we use our inverted discounted cash flow model to illustrate the high future cash flow expectations implied by Airbnb’s current valuation.

To justify its price at the time of writing of $145/share, Airbnb must:

• Improve the NOPAT margin to 20% (more than 2x the 2021 margin and higher than Booking’s 2021 NOPAT margin of 17%) and
• Grow revenue by 30% per year through 2030 (above consensus estimate of 24% CAGR from 2021 to 2024

In this scenario, Airbnb would earn nearly $65 billion in revenue in 2030, or 11 times Airbnb’s revenue in 2021, 6 times Booking’s revenue in 2021, and 3 times the combined trailing twelve-month revenue of Booking, Expedia , Trip.com and Tripadvisor. At Airbnb’s TTM take rate, or revenue generated by GBV (total platform sales), the above scenario implies that ABNB reaches $505 billion in gross booking value in 2030. For reference, the entire global hotel and other travel accommodation market was worth an estimated $802 billion in 2021.

Note that companies that increase their revenue by more than 20% per year for such a long period of time are incredibly rare. As a result, we consider cash flow expectations in Airbnb’s share price to be excessively high, indicating that the downside risk is far greater than the upside potential.

ABNB has over 57% cons: If we assume that Airbnb:

• NOPAT margin improves to 20%,
• Revenues grow at consensus rates in 2022, 2023, and 2024 (32%, 20%, and 21%), and
• Revenue grows by 21% (continuation of consensus) each year from 2025 to 2030, then

ABNB is only worth $76/share today – a drop of 57 = 49/175%. Airbnb would still earn $36 billion in revenue in 2030, or 6x its 2021 revenue, 3x Booking’s 2021 revenue, and 1.6x the combined 2021 revenue of hotel giants Marriott (MAR), Hilton (HLT) and Hyatt ( H). Additionally, this scenario implies that Airbnb generates $7.2 billion in NOPAT, which is 14x its 2021 NOPAT, 4x Booking’s 2021 NOPAT, and 1.6x the highest NOPAT ever recorded by Booking, which was earned in 2018.

ABNB could have more than 72% disadvantages: If the expected stabilization of profitability or ADRs in 2022 were to remain lower for longer than expected, the decline would be even greater. If we assume that Airbnb:

• NOPAT margin improves to 18% (double NOPAT margin 2021),
• Revenues grow at consensus rates in 2022, 2023, and 2024 (32%, 20%, and 21%), and
• Revenue increases by 15% each year from 2025 to 2030, then

ABNB is only worth $49/share today, down 72%. In this scenario, Airbnb would still earn $27 billion in revenue in 2030, or 4x its 2021 revenue and nearly 2x the highest revenue ever recorded by Booking, which was achieved in 2019. This scenario also implies that Airbnb generates $4.7 billion in NOPAT, or 9x its 2021 NOPAT and 2.5x 2021 NOPAT from Booking.

Figure 3 compares Airbnb’s implied future NOPAT in this scenario to its historical NOPAT as well as the 2021 NOPAT of Booking and the combined 2021 NOPAT of Marriott, Hilton, and Hyatt.

Figure 3: Airbnb Historical and Implied NOPAT: DCF Valuation Scenarios

Each of these scenarios also assumes that Airbnb can increase revenue, NOPAT, and free cash flow without increasing working capital or fixed assets. This assumption is unlikely, but allows us to create best-case scenarios that demonstrate how high the expectations built into the current valuation are. For reference, Airbnb’s invested capital has grown 377% compounded annually since 2019.

This article was originally published on March 14, 2022.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, industry, style, or topic.