Booking Holdings: Unlocking Value Through the 'Connected Trip'

We hope you've returned from your holidays refreshed and ready to dive into 2024 with new investment ideas. Last year, we began our journey by covering lululemon athletica → lululemon Athletica Inc. - It’s all about branding, which delivered a remarkable 63% return. For 2024, we've chosen to commence with an analysis of Booking Holdings (“Booking”, “BKNG”, and “Company”).

The choice of Booking stems from the need to evaluate whether the Company trades in an overvalued territory, considering its significant +54% price growth in 2023. Additionally, we will assess the Company's recent performance against its primary competitors, namely Expedia ("EXPE") and Airbnb ("ABNB"), to assess its standing within the market.

If you are interested to read more about Booking Holdings, you can explore the following links:

• Commonstock 'Buy the Dip' Idea Winners – Analyzing why Booking was a solid idea in July 2022

• Booking Holdings Analysis – Access a free YouTube video and a downloadable PDF presentation (May 2023)

• Earnings Brief: A Quick Review – Insights from a brief update on Q3'23 performance (Nov 2023)

Contents:

1. Performance Update

2. Peer Comparison

3. Industry Forecasts

4. Valuation

5. Conclusion

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1. Performance Update

Booking is a titan in the Online Travel Agency (“OTA”) industry, with Trailing Twelve Months (“TTM”) revenues of $20.6 billion, surpassing Airbnb ($9.6 billion) and Expedia ($12.6 billion) in scale.

In the wake of the pandemic, Booking faced challenges but demonstrated remarkable resilience by swiftly rebounding and capitalizing on the ‘revenge travel’ trend. While many industry players anticipated benefits from this trend, Booking's adept management and execution in a near-zero travel period truly speaks about management’s capabilities.

As we'll see later, Booking not only gained market share but also underwent a business transformation. While its core remains in the online accommodation sector, the Company has diversified into various services like flights, attractions, alternative accommodations, loyalty programs (Genius), and merchandising, reshaping itself into the entity it is today.

The present offerings and ongoing investments toward its 'Connected Trip' vision, including expanded services like flights and the integration of advanced technologies such as gen AI (e.g., Penny chatbot travel assistance for Priceline), are poised to drive the Company's future. Management is confident that the ‘new’ algorithm, is likely to exceed the pre-Covid algorithm of 8% revenue and bookings growth, and 15% EPS growth.

Source: Koyfin (affiliate link with a 15% discount for StockOpine readers), StockOpine analysis | Notes: [1] For the EBITDA margin we added back the operating lease amortization as it was treated as debt, [2] To give a better view on FCFs we subtracted SBC.

The trend depicted in the above chart illustrates a full recovery post-pandemic, with revenues and free cash flows surpassing FY19 figures. However, EBITDA margin standing at 33.9% has remained below the ~38%-40% historic levels. Expecting a return to these margins in the near future is merely wishful thinking, detached from the current reality, however, several structural factors explain this 'new' profitability.

a. The rise in merchant revenue's share in the mix has increased from 25.4% in 2019 to 49.7% in TTM terms (56% in Q3’23). Merchandising grants Booking the ability to influence pricing through targeted discounting and coupon offers; and while this may lead to lower Average Daily Rates (“ADRs”) and consequently lower margins, it's a sensible move as Booking possesses better regional pricing insights compared to individual hosts. This strategy also facilitates higher occupancy rates.

b. Merchandising is closely linked to payments processed through Booking’s platform, accounting for 51% of gross bookings compared to 40% in Q3’22. Although Booking may incur higher payment processing fees, it significantly enhances the overall customer experience (available methods, flexible terms etc.). Moreover, this shift improves the cash operating cycle, as indicated by the increasing free cash flow margins in the chart above.

c. Loyalty Genius program: The increasing number of individuals joining tier 2 or 3 (as per management, reaching millions at Tier 3) enables guests to access higher discounts. The advantage of these loyal customers lies in repeat purchases due to rewards which consequently, leads to higher sales volumes.