2023-09-18 04:17:55 ET
Summary
- Booking.com is dominating a promising industry with double-digit growth expectations over the next five years.
- The company's financial performance over the long term has been stellar, with strong revenue growth and impressive profitability metrics.
- Booking.com is well-positioned to maintain its dominance in its niche, with low threat levels from competitors, and has a strong balance sheet and liquidity metrics.
Investment thesis
Booking Holdings ( BKNG ) "Booking.com" is one of my favorite apps because it is a synonym for "vacation" to me. But apart from positive emotions caused by the company's flagship app itself, I enjoyed analyzing this stock. I love businesses demonstrating solid revenue growth, wide profitability metrics, and massive stock buybacks. Booking delivers all of the above to its investors since the company is dominating a promising industry, which is expected to sustain double-digit growth over the next five years. Moreover, the valuation suggests a 40% upside potential, which I consider as a gift for such a high-quality business. All in all, I assign BKNG a "Buy" rating.
Company information
Booking Holdings Group offers various online booking services, including flights, car rentals, cruises, accommodation, and vacations.
The company's fiscal year ends on December 31. According to the latest 10-K report , approximately 89% of the company's revenue in FY 2022 relates to online accommodation reservation services.
Financials
Booking's financial performance was nothing but stellar over the past decade. Revenue compounded at 10.8% per year, which is solid. But the company's profitability metrics look even more impressive, with the gross margin consistently above 80%, except for the "COVID year" 2020. The pandemic-related travel restrictions were a harsh disruption for the company because its sales significantly depend on the global travel volume.
Having such stellar profitability means the company is able to reinvest in growth, keep shareholders happy, and sustain a sound balance sheet. Booking does not pay dividends but conducts massive stock buybacks. The TTM buybacks comprised a massive $9.5 billion, almost half of the revenue during the same period. The balance sheet is strong, with almost a billion-dollar net cash position and strong liquidity metrics.
Seeking Alpha
The latest quarterly earnings were released on August 3, when the company topped consensus estimates. Revenue demonstrated a massive growth momentum with a 27% YoY increase. The adjusted EPS almost doubled as the operating margin expanded by more than seven percentage points.
Revenue is expected to maintain strong momentum as the travel industry continues to recover after the pandemic-related headwinds. The upcoming quarter's earnings are scheduled for release on November 3. Quarterly revenue is expected by consensus at $7.24 billion, which indicates a 20% YoY growth. The adjusted EPS is expected to follow the top line with a notable expansion from $53 to $68.
Booking operates in a growing industry, expected to compound at about 10% annually over the next five years. And Booking.com is leading this growing market both in the U.S. and internationally . Booking's wide profitability metrics allow the company to invest heavily in growth organically and via acquisitions. Solid profitability also allows Booking to innovate and expand its offerings to its website and app users.
Expedia ( EXPE ) and Airbnb ( ABNB ) are the closest competitors, and I would like to compare the efficiency of these key players through the profitability prism. As we see, Booking is leading in terms of most profitability metrics. However, I would like to emphasize that Airbnb's net income per employee is higher by a staggering 75%.
To me, per-employee metrics are essential to understanding the efficiency of the business because the most efficient wins the race in the long term. On the other hand, while Booking and Airbnb serve travelers seeking accommodations, their core offerings and business models are distinct. BKNG mainly focuses on hotel accommodation reservations, including chain hotels, boutique lodgings, and bed-and-breakfasts. At the same time, ABNB focuses on peer-to-peer property rentals, allowing individuals to list and rent out their personal spaces, homes, or unique accommodations to travelers. That said, these two businesses rarely overlap, which means that the threat level from Airbnb is low to Booking. Therefore, I think that Booking is highly likely to maintain its dominance in its niche, which makes the company well-positioned to absorb industry tailwinds.
Valuation
The stock rallied 55% year-to-date, significantly outperforming the broader U.S. market. Seeking Alpha Quant assigns the stock a low "D" valuation grade due to substantially higher multiples than the sector median. On the other hand, the current multiples are notably lower than historical averages, which indicates undervaluation to me.
I want to use discounted cash flow [DCF] to strengthen my valuation analysis. I use a 10% WACC for discounting. I have revenue consensus estimates up to 2030 and expect a 5% revenue CAGR for the years beyond. I use a 25% FCF margin for my base year, which approximately aligns with recent years with the "COVID year" excluded. I also expect a 50 basis points FCF margin expansion as the business continues scaling up.
According to my DCF simulation, the business's fair value is $160 billion, which signals a 40% upside potential. That said, my target price for the stock is approximately $4,450.
Risks to consider
As the company's financial performance in 2020-2021 suggests, BKNG's earnings are significantly dependent on the overall health of the travel industry. Since travel is mostly discretionary spending for households, this industry is vulnerable to changes in macroeconomic cycles. We are in a challenging environment with surging inflation and high interest rates, which drain people's residual income. On the other hand, people could not travel in 2020-2021 due to COVID-related restrictions, and recent earnings dynamics suggest that the demand for travel is surging. But, if the fight against inflation will last longer than expected, the unfavorable macroenvironment will ultimately weigh on the travel industry. But I consider these challenges temporary and not secular. Booking has sufficient resources to weather the storm. It is crucial to underline that the company survived during the massive lockdown environment, which indicates strong resilience.
As a growth stock, the valuation significantly depends on the level of interest rates. While inflation has cooled off notably from last year's highs, future interest rate movements look very uncertain. Federal funds rates are already at their highest since the early 2000s, but Fed officials' rhetoric has been mostly hawkish recently. That said, investors should be ready to tolerate short-term volatility caused by news related to the Fed's rates and inflation.
Bottom line
To conclude, Booking is a "Buy". The company is leading in a promising industry and demonstrates more robust profitability than its closest competitors. The financial position is strong and wide profitability metrics allow BKNG to balance between fueling future growth and keeping shareholders happy with massive stock buybacks. Last but not least, the stock is massively undervalued even after a solid year-to-date rally.
For further details see:
Booking: Appears Undervalued Despite The Rally