‘Buy the Dip’ Idea Competition – Our take is $BKNG
Our ‘Buy the Dip’ Idea is the leader in OTA industry, namely $BKNG. At first glance, it might seem a contrarian choice considering the recession fears, although we expect a decent performance on a risk/return basis for the next 12 months and in the years ahead. Let’s dive in (11mins read) to see what shaped our decision.
- WHAT'S THE THESIS?
Valuation: We consider that Booking is currently undervalued and recession fears are priced in. The stock can go lower but per our assumptions we estimate an upside of 35%-40%. As Warren Buffet said, “If a business does well, the stock eventually follows".
Travel Recovery: Summer 2022 bookings for $BKNG are already higher Vs 2019 by 15% and industry forecasts are promising (CAGR of c. 17% for 2021 – 2026).
Moat: A Leader in OTA market benefiting from its network effect (+220 countries, +28m listings, 2.4 million properties) and optionality (airline tickets, rent a car, alternative accommodation) which translate to a quality business with higher margins relative to competition.
Capital allocation: Heavy share buybacks over the last 10 years with around 70% of the cash generated from operations returned to shareholders, without disrupting the business from growing. The management view (Cowen conference) remains unchanged -> a) invest in the business (organic, strategic partnerships or M&A) and b) return excess cash to shareholders.
- DO WE SEE ANY UPSIDE FROM CURRENT PRICE LEVELS?
2.1 The DCF Approach
Per our revised valuation the estimated stock price is $2,545 giving a potential upside from the current price of $1,738 (as of 12th July 2022) of c.46.4%.
In brief, the revenue was based on analysts’ consensus and was compared to industry forecasts for Travel & Tourism as provided by Statista (i.e. 17% for 2021-2026), whereas for the EBITDA margin we assumed an average projected margin of 32% increasing to 34% at terminal year. It should be noted that the average EBITDA margin for 2012 to 2021 stood at 31.5%, whereas if 2020 is excluded the average EBITDA margin is 37.2%.
To account for the additional macroeconomic risks, our minimum required return of 10% was used in our model to discount projected cash flows rather than the estimated WACC of c.9.3%.
In respect to the terminal multiple, we used 15x which is lower than the 5 year average and the TTM multiple of 18x. A lower multiple was used to account for the reduced growth opportunities after 2026 (provided that CAGR of 20% materializes) and to be in line with the average of 15.1x EV/EBITDA (NTM) of selected Hotels, Restaurant and Leisure stocks.
2.2 The Multiple / Hybrid approach
Due to the current uncertainty, we run a scenario analysis adjusting the estimated EBITDA for the next 12 months and the EV/EBITDA multiple. Based on our analysis, we estimate that there is a weighted potential upside of c.31.8%.
To shed some light on our assumptions (which may not materialize) the estimated EBITDA (TTM) was based on analysts’ consensus adjusted for timing (as historically the majority of EBITDA of $BKNG occurs in Q3) and applied a discount of 5%, 20% and 0% for Base, Pessimistic and Optimistic scenarios, respectively.
The Multiples used were based on a) Base: the TTM multiple of $BKNG of 18x discounted by 10%, b) Pessimistic: average of NTM multiple of the selected peers discounted by 10% and c) Optimistic: the average EV/EBITDA multiple of $BKNG for the years 2012 to 2021 (excl. 2020).
- A HIGHLY PROFITABLE AND CASH GENERATING BUSINESS
3.1 Growth and Margins
Financial performance of $BKNG is remarkable and has been consistently growing revenues and EBITDA with the exception of 2020 (pandemic impact). As it can be observed from the below graph, the business is growing profitably and with impressive free cash flow conversion. Such results demonstrate that Booking has operating leverage and an ability to maintain its take rate/pricing (Revenue/Gross Booking volume) as the hotel industry is fragmented while the OTA market is concentrated on 3 key players ($BKNG, $EXPE & $ABNB).
Source: Koyfin, Seeking Alpha, StockOpine analysis
On the other hand, Expedia which by revenue is considered the 2nd largest OTA (Revenue of leading OTAs worldwide 2021 | Statista ) operates with much lower profit and free cash flow margins. Additionally, during the pandemic it revealed more vulnerability to economic shocks compared to $BKNG as its FCF margin fell to a negative 89% and its EBITDA margin to -24 (see graph below).
Source: Koyfin, Seeking Alpha, StockOpine analysis
We do not claim that $BKNG is more robust to $ABNB since $ABNB faced a smoother reduction in gross booking volume compared to $BKNG during the pandemic. Despite this, both companies are recovering recording their highest GBV in Q1’22 ($BKNG - $27.3B and $ABNB - $17.2B).
Although the management composition was not a factor in choosing Booking, the fact that Glenn Fogel has been with the Company since 2000 and serves as the CEO and President of Booking Holdings Plc since 2017 and as CEO of Booking. com since June 2019 says something about his ability to execute.
3.2 Bookings, nights booked and outlook
Gross Bookings and Nights booked grew since 2008 (with the exception of 2020) which implies that the revenue and EBITDA growth observed are clean from any significant one-off events.
Source: Booking Holdings website
As noted above, GBV in Q1’22 of $27.3B exceeded Q1’19 ($25.4B) by 7%, whereas Nights booked of 198m fell below Q1’19 (217m) by 9%.
Additionally, in the recent Cowen conference (2nd of June 2022) Glenn Fogel indicated that the summer bookings are 15% ahead compared to 2019, whereas if the geography is restricted to US & Europe that translates to 30%. No guidance was given for post summer period due to the uncertainty and unpredictability of the industry (imagine what happened in the last 2.5 years!).
4. WHAT IS THE MOAT OF BOOKING?
4.1 The high barriers of entry due to network effects give an advantage of existing players over new entrants. For example, Booking is attracting more and more consumers since its supply of hotels, vacation rentals etc. is larger than what a single hotel chain has to offer. As a result, hotels list their properties on Booking to capitalize on its customer base.
Per Booking website and latest 10-Q filing, there are 28+ million listings (hotels, apartments, homes etc.) in +220 countries and 2.4 million properties whereas per Statista (Largest hotel chains by properties) the top 10 hotel chains, when combined, own only c. 46k properties (as of September 2021).
4.2 Optionality: Beyond booking a hotel, vacation rental or alternative accommodation it also offers flights booking, rent-a-car, booking a visit to an attraction / activity, restaurant reservation etc. The progress seen in flights is impressive, as in Q1’22 5m tickets were sold, that is 2.5x what was sold in Q1’19 (as indicated by David Goulden during Cowen conference).
Source: 10K reports, StockOpine analysis
The company is also taking measures to progress in alternative accommodation and to better position the firm in US market (where it lacks) by introducing reasonable liability insurance, improving payment system and by talking to hosts.
- IS THE POST-COVID TRAVEL RECOVERY HAPPENING OR SHOULD WE WAIT?
The Travel & Tourism market is projected to reach US$637.6bn in 2022 and generate an annual growth rate (CAGR) of 17.1% for 2021-2026, resulting to a projected market volume of US$949.6bn by 2026.
Source: Statista (published on Jun 2, 2022)
With inflation reaching another 40-year high (9.1%) on July 13th, 2022 and the expectation of further rate hikes, the recession fears grow and if materialize, they could distort the above estimates.
Despite such fears, we extracted information from 2 different sources which effectively show the willingness of people to travel irrespective of price hikes, delays or flight cancellations.
Summer Travel Survey 2022 - More than 42% of American adults will travel more this summer than last summer.
US Travel Demand Remains Strong Despite Inflation | TravelPulse - The research, based on data from OAG's Flightview flight-tracking app, found that 27 percent more people are traveling this summer compared to 2021.
To conclude, there are imminent risks under the current environment but we also agree with Glenn Fogel who recently said “People will always want to travel. They always have it. World War 2 ends and a couple years later, Americans all over Europe. It's going to happen. Pandemics – and people want to travel."
Thank you for reading this memo and make sure to follow us on Commonstock and subscribe to our newsletter in substack!
Disclaimer: Not a financial/investment advice. The team does not guarantee the accuracy or completeness of the information provided in the memo. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.
Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein.
Amazing job @stockopine, I can't believe how many of the pitches I get to read, they are all so high quality.
@stockopine quantitatively, if someone thinks consensus estimates are woefully wrong, I want to hear why and see the supporting figures/evidence to back that up.
Since consensus estimates often turn out to be pretty correct, or at least tough out-do with any consistency since sell-side analysts typically have more access to management and thus perhaps better insights into the business (in my opinion!), more often I think a good pitch will rely on the qualitative factors that might lead a business to outperform competitors over time.
In your pitch you mentioned network effects as Booking's moat. But I would argue Expedia and Airbnb also have network effects. So why has Booking been able to generate such massively better margins and ROIC than Expedia? Clearly some sustainable competitive advantage is at play here, although I don't know what it is. I want to own the stock and agree its too cheap, but I would love to better understand why they've been able to outcompete Expedia and be able to articulate it before owning the stock.
In contrast, I feel like I know & understand Airbnb's long-term competitive advantage vs. Booking and Expedia: brand.
I believe Airbnb's brand will directly result in them having a lower CAC -- less sales & marketing spend as a % of revenue, and less reliant on Google for traffic -- and that this will be a durable competitive advantage.
That is not what is in the numbers yet, as Airbnb is a less mature company and is investing more heavily in growth (IMO...others might disagree!), but I believe it will begin to manifest itself in the numbers over time.
When I'm looking for an Airbnb, I go to straight to airbnb.com or the app.
When I'm looking for a hotel, I'm much more likely to land on Booking via Google.
Most people I've talked to report the same experience/habits. Would love to hear your thoughts on this since in your disclosures you mention you own both.
@zmo Thanks for the comments Zack. In general we tend to agree with your comment about consensus estimates, although they should always be taken with a grain of salt when these extend to a longer horizon. For sure, they know better than almost anyone for the next or couple of quarters but predicting the outcome for the next 5 years it’s always a tough task to do (if not impossible). Additionally, the analysts tend to revise their forecasts once new information is received therefore the estimates are not static. In our opinion, you always need to do a sense check and make sure you run a scenario/sensitivity analysis since even analysts’ estimates vary from one analyst to another (for example in 2023 $BKNG revenue forecasts, the low from high estimate deviate by c. 26%).
Based on that we are of the opinion that you cannot ignore quantitative factors in a pitch.
In respect to the network effect comment we are fully aligned with you. We cannot argue that $EXPE or $ABNB do not have a network effect but it seems that $BKNG is somehow ahead in the mobile front compared to $EXPE as shown by the Worldwide OTA apps downloads provided by Apptopia. In 2021, Booking was 1st with 63M (Agoda was 5th with 14M), Airbnb 2nd with 44M and Expedia 4th with 15M (Vrbo was 6th with 13.4M and Hotels.com 8th with 12M). For H1 2022, Booking was 1st with 41M (Agoda was 6th with 8.8M), Airbnb 2nd with 27M and Expedia 3rd with 12.4M (Vrbo was 5th with 11.9M and Hotels.com 7th with 7M).
In respect to profitability, we believe that this is mainly explained by the following reasons. Firstly, the multi-brand strategy of Expedia Vs Booking (mainly generates its revenue from Booking.com) creates a better brand positioning for Booking. Additionally, by having a multi-brand strategy it is possible that certain brands will be less profitable than others.
Secondly, Booking is dominant in EU (Statista data for Hotel bookings give a market share of 67.7% to Booking vs 12.8% for Expedia for 2019). As a result, Booking deals with non-branded hotels (EU hotel market is more fragmented) in which Booking can charge a higher take rate as the hotels need access to its platform. This is also justified by the historically, higher revenue margins of Booking compared to Expedia.
Lastly, as you mentioned, you reach Booking via Google and most of your friends have similar experiences. In connection to the 2nd point, as Expedia is somehow more exposed to America it needs to spend more relative to its revenue to search engines. This is also justified by the higher relative marketing costs.
In regards to brand, as Europeans by nationality, we get the vibe that Booking also has a strong brand. Of course, it needs to spend more than ABNB who mainly serves the alternative accommodation market. It shall be noted that BKNG is already a great player in the alternative accommodation market in EU. For example, back in 2017 one of us booked a holiday villa by using Booking.
Furthermore, we don’t reach Booking via Google but go to the platform directly. The reason of doing this, is because we can also find attractive deals due to the mobile rates (which are usually lower) and the ‘Genius’ status.
Hope that justifies our rationale.
To close that, we are aligned on the view that $ABNB will eventually turn profitable and can grow its profitability, as the alternative market is even more fragmented. We also own Airbnb.
@stockopine makes sense. Seems like as an American I may not have a solid enough appreciation for Booking’s brand in Europe.
Do you have any further comments on the relationship with Google? Is it a symbiotic relationship in any way for Google? Do you attribute any long-term risk to disintermediation by Google?
I guess, to me it seems Booking’s incentives are clear: reinvest cash flow into sales and marketing to 1) strengthen brand, to drive more traffic straight to website/app and 2) be first result on google searches above Expedia.
Google’s incentives are less clear. Are they happy to take Booking and Expedia’s marketing dollars? Or would they want to move down the funnel over time?
@zmo Thanks for mentioning the relationship with Google. Disintermediation by Google is a risk that is not going to get away in the short term. However, in our opinion it is mitigated due to the following:
1) Google earns significant revenues from the likes of Expedia and Booking making the situation a win-win for all parties involved.
2) If Google moves downstream becoming an OTA would probably cause antitrust issues for Google.
3) As we shift from desktop to mobile, Booking would have more direct relationship with its customers. Glenn Fogel in Q1 said “We see the strongest direct repeat customer behavior in our mobile app than when compared to other platforms like desktop or mobile web. We continue to see more of our business shift to the app with over 40% of our room nights booked through our apps in the first quarter.”
@zmo Unfortunately, we do not have such chart readily available. What was stated in the latest call was that the Booking app hit a new record of monthly active users and that they continue to see an increase mix of their total room nights coming through direct channel Vs Q1’2019.
Provided that management discloses information in upcoming calls we will closely monitor that metric.
Excellent work, @stockopine. Do you mind if I ask what the Adjustments are in section 2.2 and why they differ between scenarios?
Thank you @valuabl . Glad that you liked it.
In 2.2 we run scenarios to project what the value would be in 12M. We had the EBITDA, the EV multiple but not the adjustments to reach the equity value.
Our "starting point" was similar to the adjustments you used in your valuation (as of 31/03/2022) and then we adjusted as follows:
a) The EBITDA to be generated through the period 31/03/2022 until 30/06/2023 should be somehow accounted in the value. After all, these will convert into cashflows.
b) We analysed the historic FCF conversion to EBITDA and added these estimated FCF (31/03/2022-30/06/2023) to the "starting point".
c) Conversion for Base was 75% in line with 10Y average, Pessimistic was negative 24% (in line with 2020) and Optimistic was 86% in line with 10Y average (excl. 2020).
@vchatz in Europe $BKNG claims to have a great market share whereas in US they need to push further. Improving their product (management stated that they will continue to work on that) with reasonable liability insurance, better payment system and talking to hosts to get more inventory, most likely it would better position the company in US.
For example in Q1'22 the global mix of room nights of alternative accommodation accounted for about 31%, which was higher than in Q1 2021 by a couple of points.
Well done for the thorough and multidimensional analysis @stockopine
We hope to see more posts from you in the future!!
Concise and to the point. what do you think of hotels getting market share from $BKNG by directing consumers to their own sites by offering loyalty programs and discounts?
@lakis well. That's possibly already happening but there are safeguards in our opinion.
1) Too risky to cut-off Booking completely as it would limit the access to its customer base. The hotel industry is fragmented therefore it makes sense for a consumer to search through OTAs.
2) Booking helps customers find a hotel even if they don't know it in advance as non-branded hotels are also displayed in searches.
3) Consumers will not easily give away their 'Genius' status, thus they would continue using Booking to ensure that they get discounts on a wider range of properties rather than on a single hotel.
Great pitch. What do you think of the foreign exchange headwind, given the USD / EUR parity?
@marios This headwind is faced by all online travel companies such as $BKNG, $EXPE and $ABNB due to their global reach and it's not something that management can really do something to control it. Truist analysts for the same reason among other factors, they recently reduced their target price from $3000 to $2600 but $BKNG was also pinpointed as "attractively valued" given its current price level.
On the other side, online travel companies would probably benefit from an increased number of US consumers traveling to EU due to the lower cost in US$.
Really great insights on $BKNG! Though a few risks worth pointing out:
1) Near to medium term war impact on their EU revenue, considering a significant portion of their rev come from EU, and as the pent-up travel demand wanes amidst worrisome EU economy and travel sentiment due to war
2) Long term revenue impact from $ABNB as they continue to evolve and take market share from hotels/OTA
3) Long term revenue impact from direct App bookings as more and more people can just go directly to airline apps for flight tickets, Airbnb for vacations, car rentals for cars and hotels for rooms
No doubt $BKNG is still a great company with impressive performances, but IMHO investors might want to ask these hard questions before buying, especially plan to hold it long term.
Thank you, Eric. Indeed, those are important risks to be pointed out to potential investors. We are aligned with you on this. However, in our opinion the below remedying factors are possibly underrated by the market.
- Despite inflation and Russian invasion, it seems that travel remains strong with major OTAs reporting record GBVs Q1 and in April. In the short term is possible that travel recovery will be disrupted due to the macro environment uncertainties. However, people will always travel, and this will be a short-term headwind.
- $ABNB created a wholly new market and with its first mover advantage it became a leader. We do not think that this is necessarily a bad thing for $BKNG. It is not that hotel accommodation is going away. In addition, $BKNG is also benefiting from the increase market of alternative accommodation by leveraging its consumer base. As per David Goulden 31% of online bookings in Q1 were in alternative accommodation. Management is ware that it lags $ABNB and is taking steps to improve its product offering (liability insurance, payments system, etc).