Investment Thesis
Booking Holdings (NASDAQ:BKNG), the travel giant behind Booking.com, Priceline, and Kayak, reported strong first quarter in 2024. Revenue climbed 17% YoY to $4.4 billion, exceeding analysts expectations. Earnings per share (EPS) also jumped significantly to $20.39, compared to $7.07 in Q1 2023. Gross travel bookings reached $43.5 billion, reflecting a 10% increase. Room nights booked rose 9% YoY. The company also declared a cash dividend of $8.75.
It was a solid earnings report and Booking stock surged over 9% in after hours trading after the report’s release. During the earnings call Booking’s CEO stated that they are experiencing high growth in “higher frequency” users and increasing loyalty program enrollment. The company remains optimistic about continued travel demand, particularly for the summer season. Air ticket bookings witnessed a significant 33% increase YoY.
We see encouraging behavior from our Genius-level 2 and 3 travelers including higher frequency and a higher rate of direct booking than what we see for our overall business.
Beyond the positive results, it’s important to consider some risks. Booking is facing increasing regulatory scrutiny in Europe, where regulators are calling it a “gatekeeper” and are opening investigations into potential anti-competitive practices. I believe this should not have an impact in earnings and regulatory scrutiny usually comes after big companies like Booking.
In a separate article, I recently explored the contrasting fortunes of Booking’s distant second competitor, Expedia (EXPE). While booking exceeded expectations, Expedia fell short, particularly in gross bookings for its platform. I believe Booking is gaining markets share form Expedia.
Booking Q1 2024 beat analysts’ expectations, driving a stock surge. I find that their leadership position and focus on direct bookings, supplier partnerships and especially innovation in generative AI for customer experience, could result in more future growth. I also find the company a solid candidate to my growth at reasonable price (GARP) strategy. However, caution is advised, as you will read later, I find the stock fair or even overvalued at the present moment. Further, while long-term growth is possible due to their leadership position and financial resources, the all-time high stock price necessitates a conservative approach.
Therefore, considering all this factors, I am initiating coverage with a “cautious buy” as I will a buyer of shares on a weakness.
Management Evaluation
Glen Fogel, CEO of Booking Holdings boasts a 24 year career with the company. He’s overseen Booking’s growth strategy, including key acquisitions, and currently leads the company’s global operations. Employees seems to appreciate his leadership, reflected in high Glassdoor ratings. Interestingly, most of his compensation comes in stock options, aligning his financial success with the company’s long-term performance. This pay structure suggests to me a strong focus on Booking’s future success, though it also makes him one of the industry’s highest paid CEOs.
Ewout Steenbergen steps into the CFO role at Booking Holdings, inheriting a company with a complex financial situation. Booking has been repurchasing shares, funded by issuing bonds which has been hurting Free Cash Flow (FCF). While I don’t find this method of buying back shares necessarily negative as one-time event to show confidence in the future of the company, it is concerning since the company’s debt has been steadily rising post-pandemic and equity is now negative.
I believe every dollar spent on interest payment is a dollar unavailable for growth initiatives. Steenbergen will need to navigate this situation effectively to ensure Booking maintains its financial health while fueling future success.
Now on to our cash and liquidity position. Our first quarter ending cash and investments balance of $16.4 billion was up versus our fourth quarter ending balance of $13.1 billion due to the $3 billion debt issuance in the first quarter and $2.6 billion in free cash flow generated in the first quarter. This was partially offset by the $1.9 billion in capital return including share repurchases and the dividend we initiated in the quarter as well as $315 million in additional share repurchases to satisfy employee withholding tax obligations.
Overall, I find that Booking presents a mixed bag. CEO Glen Fogel’s impressive career includes strategic acquisitions and high employee morale. His stock heavy compensation aligns his interests with long term success, though it makes the best paid CEO in the industry. However, the company financial picture warrants monitoring. New CFO Ewout inherits a situation where share repurchases funded by bonds have decreased FCF and impacted equity to negative territory, this limits resources for growth. Further, the company also started paying a dividend this year which I find positive for now as it is also an indication that management hasn’t find other avenues for growth. Considering all factors, I am giving management a “Meets Expectations”. Fogel’s leadership is solid but future growth plans beyond share repurchases are crucial.
Corporate Strategy
Booking is the leader in the online travel agency (OTA) market by offering a massive selection of flexible accommodations, from budget friendly options to luxury stays. This caters to a wide range of travelers. It further strengthens its grip on the market by offering flexible booking options and rewarding repeat customers.
They have been constantly growing expanding into new markets and acquiring complementary businesses to broaden their offerings beyond just accommodation. Additionally, the company prioritizes investing in technology like AI and machine learning to help user plan their vacations and personalize their experience optimizing search results.
I have created a table comparing Booking current strategy to some of it current competitors in a previous article here but I’m also updating it and adding it here:
Expedia (EXPE) |
Booking Holdings (BKNG) |
Airbnb (ABNB) |
Trip.com (TCOM) |
|
Market share (Accommodation Bookings) |
15% |
27% |
13% |
10% |
Corporate Strategy |
Focuses on bundled travel packages and brand diversification. |
Aggressive on direct bookings, and supplier partnerships. Focus on enhancing loyalty program through AI. Become one stop for all travel needs. |
Disrupting traditional hospitality with unique stays, expanding to experiences |
Focuses on Asia Pacific market, strong mobile presence, expanding vacation rentals. |
Competitive Advantage |
Extensive network of travel suppliers, brand recognition, loyalty program (OneKey) |
Largest online accommodation marketplace, strong mobile presence, efficient marketing. Solid Financials. |
Unique lodging options, growing experiences marketplace |
Strong brand recognition in Asia, competitive pricing, focus on mobile users. |
Source: From companies’ website, presentations, SeekingAlpha
Market share: Statista (2023)
Several key factors differentiate Booking from its competitors. Compared to Expedia, Booking boasts a wider range of flexible accommodations, particularly in non-western markets. While Airbnb offers unique lodging options, Booking caters to those seeking standardize hotel experiences. Finally, Booking enjoys a clear advantage in user experience and global reach when compared to the Asia-focused Trip.com.
However, Booking also faces some challenges. Their reliance on commissions from accommodation providers can limit profit margins if those rates decrease. Additionally, their focus on hotels might not appeal to travelers seeking one-of-a kind experience. Finally, stringent regulations in some regions could hinder Booking ability to operate or collect data.
Valuation
Booking currently trades at around $3,800, trading close at all-time highs since its last reported earnings in early May.
To assess its value, I employed a 11% discount rate, this rate reflects the minimum return an investor expects to receive for their investments. Here, I am using a 5% risk free rate, combined with the additional risk premium for holding stocks versus risk free investments, I’m using 6% for this risk premium. While this could be further refined, lower or higher, I’m using it as a starting point only to get a gauge for unbiased market expectations.
Then, using a simple 10 year two staged DCF model, I reversed the formula to solve for the high-growth rate, that is the growth in the first stage.
To achieve this, I assumed a terminal growth rate of 4% in the second stage. Predicting growth beyond a 10-year horizon is challenging, but in my experience, a 4% rate reflects a more sustainable long-term trajectory for mature companies that should be close to historical GDP growth. Again, these assumptions can be higher or lower, but from my experience I feel comfortable using a 4% rate as a base case scenario. The formula used is:
$3,800 = (sum^10 FCF (1 + “X”) / 1+r)) + TV (sum^10 FCF (1+g) / (1+r))
Solving for g = 14%
This suggest that the market currently prices BKNG FCF to grow at a rate of 14%. According to Seeking Alpha analyst consensus FCF is expected to grow at a 9.74%
Therefore, I believe BKNG is overvalued at this point. However, it’s important to note that the company has been artificially buying back shares by issuing debt which is impacting FCF growth. I will be a buyer on a weakness as I believe the company has a competitive advantage and will maintain its leadership in the OTA industry.
Technical Analysis
BKNG has jumped around 10% since its last reported earnings in early May. Its RSI seems under control at around 56 having crossed it 14-day average of 49 and pointing to keep increasing indicating that the stock might continue to increase in value. BKNG all-time high is around $3,904; that is around a 2% move from current levels. Momentum according to SeekingAlpha is positive:
I believe BKNG will touch its all-time high due to the positive momentum but once it’s there it will stay neutral moving in a range of around $4,100 and $3,700. I will be a buyer of share on any weakness despite current challenges as I believe FCF will improve faster than expected based on management ability to generate excess EPS over time.
Next earnings are August 5th
Takeaway
Booking impressed with a strong Q1, exceeding analysts expectations. While the company has a solid record, led by an experienced CEO with high employee satisfaction, I’m taking some caution. The company is positioned for future growth, and it appears to be taking market share from its competitors. However, the stock price is reaching an all-time high and has recently started paying a dividend but FCF is decreasing due to the debt-funded share repurchases. Overall, Booking is a leader with a strong foundation despite the share price looking inflated. Therefore, despite the mixed signals in the stock I am inclined to start coverage with a cautious buy particularly on any weakness.
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