2023-06-16 07:16:21 ET
Summary
- Global travel is on the rise, which is a positive trend for Booking.com. Near-term momentum could continue but YoY growth rates expected to moderate due to tough comps.
- Booking's Connected Trip strategy could support medium-term prospects and early results in terms of market share gains are encouraging.
- Potential recession may curtail travel recovery while competitive risks could impact financial performance.
Booking Holdings ( BKNG ) is benefiting from strong post-pandemic travel recovery. Near-term prospects are cautiously positive along with the continued recovery of international travel while their Connected Trip strategy could support medium term prospects. Recession risks however could dent near-term prospects while competitive risks could mar medium-term performance.
Q1 2023: solid recovery with gross bookings and revenues up
For Q1 2023 (quarter ended March 2023), Booking Holdings reported revenues up 40% YoY on a reported basis (47% on a constant currency basis) to USD3.8 billion, on the back of a 44% YoY increase in gross travel bookings which amounted to USD39.4 billion for the quarter, and a 38% YoY increase in room nights booked. Booking's performance outpaced rival Expedia ( EXPE ) whose gross bookings rose 20% YoY to USD29.4 billion the same quarter.
All revenue streams reported YoY growth;
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Agency revenues (whereby Booking Holdings does not facilitate payment from travelers for travel services provided, meaning travelers pay the travel service provider directly and Booking collects their commission after travel is completed) saw revenues rise 22.8% YoY to USD1.78 billion.
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Merchant revenues (whereby Booking Holdings facilitates payment from travelers for travel services provided, meaning travelers pay Booking Holdings directly rather than the travel service provider) saw revenues rise 66.8% YoY to USD1.75 billion, continuing on a trajectory seen last year when overall revenue growth was primarily driven by Merchant revenues, as a result of Booking's shift from an agency model to a merchant model.
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Advertising revenues rose 25% YoY to USD244 million.
Booking.com 10-Q, Q1 2023
Gross margin amounted to 80.9%, down sequentially from 85.2% the previous quarter but up from 77.9% the same quarter a year earlier. Net margin was 7% compared to a net loss the same quarter last year.
Net income for the quarter amounted to USD266 million, compared with a net loss of USD700 million the prior year quarter. Net income per diluted share was USD7 compared with a net loss of USD17.10 the same quarter a year earlier.
Near term, travel recovery momentum is expected to remain strong as international travel picks up and inflation moderates. According to the UNWTO, more than 900 million travelers traveled internationally in 2022, double the number in 2021 but still 63% of pre-pandemic levels reflecting further runway for travel to recover. Much of this recovery may be driven by China (the world's most important source market for international travelers) where travel restrictions were relaxed early this year and where inbound as well as outbound travel has yet to recover; by May, visa applications by Chinese citizens remain well below pre-pandemic levels ( 35% of pre-pandemic levels), and as of March, inbound flights into China are about a quarter of what they were the same month in pre-pandemic year 2019. Booking may not necessarily benefit materially from outbound Chinese travel (given the dominance of Chinese rivals such as Trip.com Group, Qunar, and Fliggy who collectively control for more than 60% of the market), but Booking Holdings could capture a share of inbound travel spend from foreigners visiting China.
Meanwhile, inflation has so far not dented travelers' appetite for international travel and easing inflationary pressures bode well for the sector near term. Euromonitor expects inflation to moderate to 6.9% in 2023 and 4.4% in 2024.
Euromonitor
However, Booking's top line growth is expected to moderate to mid-single digits next quarter due to tough comps (driven by strong revenue growth as a result of a strong post-Omicron travel rebound the same period last year).
Booking's top line guidance is on par with rival Expedia who also expects top line growth to moderate to mid single digits near term for the same reasons.
Over the coming year, margins are expected to improve on the back of travel demand recovery but are not expected to recover to pre-covid levels given Booking's expanding low margin flight business.
Looking further ahead, prospects are optimistic. Travel and tourism is popular as ever particularly among millennials and Gen-Zs who are known to value experiences such as travel over material purchases. Furthermore, remote/hybrid working trends are supportive of increased travel demand. Forecasts estimate the global online travel industry to grow in the mid single digits over the coming years, a positive for Booking Holdings, one of the largest players in the global OTA space.
New revenue streams from Connected Trip strategy
Booking Holdings was previously largely an accommodation platform but now they are increasingly expanding into other areas of a traveler’s itinerary. The strategy, known as “Connected Trip” could deliver considerable dividends down the road; it could expand their addressable market, open new revenue streams, and gain access to valuable customer travel data which could enhance marketing ROI, discovery of untapped opportunities and improve customer retention thereby boosting their loyalty program.
Booking Holdings already has some of the pieces needed to support its Connected Trip strategy. The company has already expanded into flights which is enjoying good traction with airline tickets booked in Q1 2023 up 73% YoY helped by the continued expansion of Booking's flight offering. In addition to accommodation and flights, Booking also offers car rentals (through RentalCars) and restaurant reservations (through OpenTable). Tying all these services together is Booking's in-house payments infrastructure.
Booking Holdings 10-K, FY 2022
Booking is also acquisitive, scooping up smaller rivals to gain market share and bolster its ecosystem. The company acquired hotel distributor platform Getaroom in 2021 and is looking to acquire Swedish travel company eTraveli.
Down the road, Booking could combine their expanding ecosystem of travel products and services under one platform or use it to sweeten their loyalty program, Genius , whose discounts and incentives are currently focused on accommodation.
Booking.com
Travel is a relatively low-frequency service but adding a high-frequency service like dining could tremendously boost the appeal of their loyalty program, differentiate themselves from the competition, and potentially help gain market share in the OTA space.
Financially, the strategy has merits. Not only could it strengthen their top line by capturing a greater share of customers' travel budgets, but on the cost side greater differentiation and customer loyalty could possibly help Booking Holdings reduce reliance on Google search advertising expenses to generate sales (Booking spent nearly USD6 billion or more than a third of their revenues on marketing expenses in 2022, a significant chunk of which was spent on Google), and possibly strengthen bargaining power with travel service providers which could make Booking's prices more competitive.
Rival Expedia too is in the Connected Trip arena, and like Booking Holdings offers similar services from accommodation, flights and car rentals. Booking however may have certain competitive advantages, notably scale advantages as the world's leading OTA player and financial advantages (Booking's FY 2022 FCF of USD6.1 billion is more than double that of Expedia’s USD2.7 billion).
Yahoo! Finance
It remains to be seen how successful Booking would be in their Connected Trip strategy however early signs suggest optimistic prospects. The company, already a strong player in Europe where it has traditionally focused , is now encroaching on Expedia's turf in the U.S., the largest online travel market in the world with Booking reportedly gaining market share in the U.S. on the back of gains from marketing efforts, expanding flight offering, and increasing adoption of their payments platform, while rival Expedia's market share has declined. Booking's global market share has also increased post pandemic while Expedia's has barely changed.
Risks
Potential recession may curtail travel recovery
Although inflation is moderating, relatively elevated interest rates could lead to a possible recession which in turn could crimp travel demand. The eurozone has slipped into a recession and China’s economy appears to be slowing . The U.S. has so far held up but some experts say the world’s biggest economy could slip into a recession at the end of this year.
Competitive risks could make Booking's Connected Trip vision an uphill climb
Rivals such as Expedia, Google, and Amazon are also developing their own "Connected Trips" and stiff competition could make Booking's efforts an uphill climb. Google ( GOOGL ) parent company Alphabet has a particularly strong business model with Google Assistant enabling customers to book flights and hotel accommodation, make payments for those flights and hotels through Google Pay, and obtain unrivaled data on tourist destinations and activities from Google Search and Google Maps. Google Search's unrivaled advantage in terms of a virtual monopoly over internet searches (a major crutch for OTAs who depend heavily on Google for search traffic) gives Alphabet a marketing advantage, and Alphabet's massive size gives the company a financial advantage smaller OTAs like Booking can't match even if it merges with Expedia (Alphabet's revenues of USD282 billion dwarfs Booking's and Expedia's combined revenues of USD29 billion).
What may separate OTAs from tech giants like Alphabet however is that Alphabet appears to be playing the role of an aggregator, rather than a typical OTA, and may be more of a threat to Booking's metasearch platform KAYAK rather than Booking itself. Alphabet's idea of Connected Trip may also differ from what OTAs are able to provide, as OTAs negotiate directly with travel service providers for discounts in return for wholesale inventory in turn giving OTAs' greater pricing and product flexibility to craft differentiated flight+hotel+other travel services packages, whereas Alphabet aggregates offers based on listings provided directly by individual travel service providers, an effort that appears to be aimed at boosting its search business and advertising revenues rather than directly competing with OTAs themselves. In any case, Alphabet's travel ambitions are likely to result in heightened competitive pressures possibly leading to high costs in terms of advertising and marketing for OTAs like Booking.
Conclusion
Analysts are mostly bullish on BKNG stock.
WSJ
Booking Holdings trades at an earnings multiple that is higher than the sector median but considerably lower than their historical average possibly indicative of investor concerns over competitive risks from tech giants like Alphabet.
Seeking Alpha
Booking Holdings' premium could be viewed as fair given its leading position as one of the world’s biggest OTAs . The stock however has already climbed 35% over the past year (so any positive near term tailwinds are probably baked in). Factoring in moderating growth due to tough comps over the coming quarters, as well as recession risks, the stock could be viewed as a hold.
Seeking Alpha
For further details see:
Booking Holdings: Cautiously Optimistic