The gold standard of travel is a solid long-term growth at a reasonable price (GARP) play.
Company Description
Booking Holdings (BKNG) is the global market leader in online travel. Via the company’s six consumer-facing brands (Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable), customers can make accommodation reservations (hotel or alternative stays like Airbnb), book airlines tickets and vacation packages, rent cars, reserve tours and other activities, or do a metasearch.
(Source: Booking 10-k)
The 20,300 employee-strong Booking.com operates in 220+ countries, is available in 43 languages, provides 24/7 customer support and offers millions of listings of hotels, motels, resorts, homes, apartments, and other unique places. According to their website, 28m+ total report accommodation listings, including 6.2 million homes, apartments, and other unique places to stay are offered. In 2019, they had revenues of $15B vs 12B for Expedia (EXPE), $5B for Airbnb (ABNB) and $2B for TripAdvisor (TRIP). It was also the most profitable of the group with an ROE of 66% (vs 14% for EXPE, negative for ABNB, and 10% for TRIP). In 2009, its revenue was only $2B while over the 2009-2019 period adjusted EPS grew from $7.49 to $98.19. For the 5 year period 2014-2019, sales grew 12% annually while EPS grew by 18% due to buybacks. I refer to 2019 (rather than 2020) due to COVID.
(Source: author, Bloomberg)
67% of revenues are generated from Agency revenues. These are essentially travel reservation commissions that are received after travel is completed. For example, a customer makes a reservation via Booking.com and pays the hotel on check-out. The hotel then pays BKNG its commission. 25% of revenues are generated from Merchant revenues. These include travel reservation commissions and transaction net revenues. Transaction net revenues are the amounts charged to customers vs fees owed to providers. Here Booking purchases room inventory at a discount and re-sells it at a premium to travelers. Merchant revenues also include credit card processing rebates, customer processing fees, ancillary fees, travel-related insurance revenues, and rental car reservations. 7% of revenues are in the other category that includes advertising and other revenues that are mainly from KAYAK for sending referrals to online travel companies and travel providers and from OpenTable for its restaurant reservation services and subscription fees for restaurant management services.
(Source: Company, author)
Tourism Industry
Increasing global income, and spending on tourism results in an industry growing above GDP levels. According to the World Tourism Organisation (WTO), tourist arrivals have been growing at 5%+ per year from 2009-2019, while emerging markets have increased their share significantly over the last 50 years (see charts below).
(Source: WTO website, presentation link)
(Source: WTO website, presentation link)
(Source: ourworldindata.org/tourism)
(Source: ourworldindata.org/tourism)
I believe the current suppressed demand due to COVID is temporary. Once the vaccines have been widely distributed, and deaths along with transmissions globally drop, then tourism will be restored. It is my opinion that travel, and discovery is in human nature. If this urge was so easily killed, then the Americas would not have been discovered! This is not the first time the world has had a pandemic or some type of turmoil. People quickly forget and move on. People still investing despite the dot-com bust and the global financial crisis. BKNG management is constantly asked about travel on practically every call, and they are very honest. They have said that they don’t know but they are confident that travel will come back eventually. They also believe that whatever losses from business travel will be covered by vacationers over time. This is already a trend which has been in place for some years as leisure has grown to 56% in 2018 from 50% in 2000 (see below). Booking CEO, Glenn Fogel, has also said that airlines and some hotels may have to adjust (eg. fewer 1st class seats). I am not sure of the effect of that but that could result in a boost to tourism if prices come down resulting in a bigger market size due to lower costs (pure speculation here).
(Source: World Tourism Organization, presentation link)
According to BKNG management, less than 1/5th is business travel based on a self-reported number (Bank of American Conference). Personally, I am not in the consensus camp, and I expect that the majority of business travel will also be restored. There is a bit of a similarity here to education. As students will be returning to class, so will businessmen on planes. Perhaps, I’m speaking from personal experiences and I’m sure that there are opportunities for some work to transfer online but I don’t agree with the generalization that business travel will radically change.
According to the World Tourism Organisation (link to presentation), there has been a global decline in traditional visas. This can only help tourism. As the world further digitizes, we can expect the visa hassle to disappear which can be an additional minor tailwind.
(Source: World Tourism Organization)
According to online sources, 60-70% of the $1.2 trillion tourism industry is done online. The continuous move to online bookings and increased use of mobile will drive additional growth.
Customer-facing desktop & mobile app
Roughly 50% of traffic to the website is direct which reduces its reliance on Google. Using data from Similarweb on the top 3 travel companies (BKNG, ABNB, EXPE) shows that desktop traffic is highest for Booking while the company clearly dominates the combined desktop/mobile space with the highest number of combined total visits of 215m vs 58m for ABNB and 36m for EXPE.
(Source: Similarweb in April ‘21, link1, link2)
If someone searches for a hotel on Google, then Booking.com is found at the top. People searching would have to scroll down to find competitors and even then, will still see additional Booking ads, or KAYAK results. Google appears in the middle with their hotels’ list. Some investors are worried that people may use the Google solution but I believe that is a greater risk for Expedia and smaller competitors rather than Booking that generates around 50% directly.
(Source: Google.com, author)
Many people have argued that Facebook’s focus on mobile was key to their success. Getting on a person’s phone is important and Booking here is a massive success. Similarweb ranks the mobile apps by country and by platform. Below we see the top free mobile apps in the United States for iPhone and Android-based on the categories listed (link to iPhone data, link to Android data). We see all major players on the iPhone but on Android only Airbnb made the top 10 with Booking and Expedia ranking No.13 and No.14 respectively (not shown).
(Source: Similarweb)
Below we see the top free mobile apps in the UK for iPhone and Android-based on the categories listed (link to iPhone data, link to Android data). Expedia is ranked No.48 (not shown) for the iPhone, while on Android Expedia does not appear in the top 50. On Android, Booking.com and Airbnb rank 11th and 29th respectively (not shown).
(Source: Similarweb)
Apptopia produces yearly lists of most download apps. Below we can see Booking’s global dominance in both 2020 and 2019.
(Source: Apptopia, link to article)
(Source: Apptopia, link to post)
I personally find the Booking App very user-friendly with all the relevant information needed. Before I show some photos of the Booking and Expedia Apps, I’d like to show again the outputs of the first two pages of searching for hotels in New York and London using my iPhone 8 Plus. Booking and KAYAK appear in both cases quite prominently.
(Source: author)
On opening both Booking and Expedia apps, we see a slightly different focus. Expedia shows more options at the top but Booking immediately brings up accommodation which is the most likely use case. Expedia excels though on activities and offers 2013 things to do in London versus only 44 for Booking and to make things worse, the Booking activities could only be found on the website. So Booking clearly has work to do in this area.
(Source: author)
Using both apps I looked for 5-star hotels in New York on June 1-8, 2021. I picked the first hotel that appeared on both apps. This was the Four Seasons. I found that not only was Booking.com cheaper but the app provides a lot of useful information such as higher number of reviews (180 vs 88), questions by travelers, places of interest, cleanliness, etc. This was all easy to see by simply scrolling down. See the pages from my iPhone:
(Source: author)
The Expedia app appeared to have less info and extra effort with only 3 pages before room selection.
(Source: author)
According to SocialMediaToday, on average a person now has more than 80 apps installed on their phone despite only using 9 apps on a daily basis and 30 apps every month. Personally, I have 132 apps installed but from the top apps above I only have Booking.com and Uber. The conclusion from this exercise is the Booking.com and Airbnb are getting all the eyeballs with Expedia further behind. The rest of the competition is probably in for some rough times. Network effects will only make this gap larger while Booking.com has an opportunity to grow in the U.S. The majority of Bookings revenues are from Europe where there are fewer large dominant hotel chains and people do not stick to one hotel brand (as in the U.S.). Furthermore, Booking has introduced the “Genius Program” which rewards customers and brings them back to the site for additional discounts, resulting in brand loyalty.
In the social media war, Airbnb leads on both Facebook and Instagram with Booking.com 2nd and Expedia 3rd. Specifically, on Instagram, Airbnb has 4,7m followers with 2,941 posts, Booking has 1,4m followers with 1,125 posts and Expedia has 0,3m follows with 1,900 posts. Under #airbnb, #booking, #expedia, the results are 5,8m vs 2,9m vs 0,2m. On Facebook, Airbnb has 16m likes, Booking has 15m likes and Expedia has 7m likes.
Booking also has a payment platform that provides people with choices (currencies and processors (PayPal, WeChat, etc)), and helps property partners (especially useful for smaller hotels). Being involved in the payment process improves customer service which leads to an increase in satisfaction and repeat business. 22% of gross bookings in 2020 were processed on the platform. The company is working on expanding this as they believe it is foundational for enabling their “Connected Trip” strategy. This strategy “is a multi-product offering, including accommodations, flight, ground transportation, and attractions and dining connected by our seamless payment networks and ultimately, supported by personalized intelligence to provide a frictionless experience for our bookers all the way from the initial booking to experiencing their trip.” While anecdotal, I think its worth mentioning that I have experienced cases where hotels, to my surprised, have directed me to either book on their site or Booking. Last year, one small hotel receptionist, actually told me she preferred if I used Booking as it was easier for her to get all my information! Having said that, I know as a fact that locally, several hotels do provide special discounted rates for locals who call.
Valuation
The company is a cash flow machine, generating $14b in free cash flow during the 2017-2019 period (vs $4b for EXPE) so normalized FCF/EV is around 4.7%. The company has used this FCF to buy back shares and has done this for over a decade. These buybacks have increased over the last few years. As a result, diluted average shares outstanding has dropped from 53m in 2014 to 41m in 2020. Invested Capital has dropped to $5,3 billion based on my calculations shown below.
(Source: Author, Bloomberg)
Considering that operating profit in 2018 and 2019 was around $5.4b and a 19% tax rate, a normalized Return on Invested Capital is currently around 83%!
So how much would you pay for a market leader that is expected to grow faster than GDP, with an 80% ROIC, and expected to continue to buy back shares?
If we ignore COVID assume that the tourism market has continued to grow at a 5% pace and that online travel increases to a 76% share by 2024 and apply that growth rate to BKNG then revenue can reach $21b by 2024 vs $15b in 2019. Applying a 35% operating margin (the lowest over the 2012-2019 period) and a 20% tax rate (vs 19% in 2019), the EPS grows to $168. At a 20x P/E (note that historically the stock has traded at a premium to the market multiple), the stock is valued at $3359 or an 11% annual return. By pure coincidence, Bloomberg shows analysts’ expectation of $168 one year later (2025). In that case, the annual return drops to 8%.
(Source: author)
