Edmund Simms's avatar
$27.2m follower assets
Buy Booking Holdings Inc $BKNG on the dip

> A titan of the global tourism booking industry, Booking Holdings Inc will look to acquire other small websites and bring them under its umbrella. The firm enjoys robust network effects powering incredible unit economics and helping it take a slice of a tenth of all global tourism bookings. The industry was walloped by the pandemic but will continue to rebound. It is likely to return to its pre-pandemic trend within a few years. Inflation is high, and interest rates are rising. Consumers whose wallets will be squeezed will become increasingly frugal; this benefits Booking.com as travellers hunt for the best price online. Starting a dividend or acquiring a company like Trainline, Webjet, or Seera could catalyse the value revelation here.

  • Stock: Booking Holdings Inc (NASDAQ: $BKNG) common equity
  • Date: July 12, 2022
  • Market cap: $70.6bn
  • Rating: Add
  • Price: $1,735
  • Target: $2,885

Setting the stage

Booking.com is a global travel reservation business. It makes money by helping consumers book accommodation, transport, and restaurants online. The firm connects travellers with tourism service providers and takes a percentage of the booking as a finder’s fee. The business has six brands:
  • Booking.com for booking accommodation online
  • Rentalcars.com for making car reservations or booking a taxi online
  • Priceline for booking cheap holidays online
  • Agoda for booking accommodation across the Asia-Pacific online
  • KAYAK is a travel price comparison website
  • OpenTable for making restaurant reservations online

Many countries’ economies rely on tourism. Over the last few decades, modern communication, household wealth growth, and sustained periods of peace helped the industry flourish. But, the previous two years have been brutal for the sector. The COVID-19 pandemic stopped people from travelling as widespread infection uncertainty, and regional restrictions closed borders. Tourism revenues collapsed. Russia’s invasion of Ukraine has notably worsened the situation for Eastern European and Baltic countries.

Despite being battered, global tourism has bounced back somewhat and is set to strengthen as countries reopen to travellers. Total worldwide revenues for the combined vacation rental, package holiday, hotel, flight, and car rental markets (hereafter collectively referred to as tourism) had hit $1.3trn by 2019 but halved in 2020. Statista, a market analytics firm, expects tourism industry revenues to continue to rebound and increase at 18% per year, hitting $1.7trn by 2026. They also reckon industry revenues will return to the pre-COVID trend by 2024.

Since making reservations online has become more accessible, there are fewer barriers to travel, and more people are choosing to book this way. According to Statista again, in 2017, 60% of tourism-related bookings happened online. By 2021 it was 66%, and they expect it to reach 73% by 2026. This trend has been valuable for Booking.com. More people travelling while choosing to do their research and make their booking online means the firm's addressable market has been rapidly expanding.

While the company benefitted from these trends, its growth has mainly come from booking more rooms rather than airline tickets or car rentals. In 2000, the firm primarily sold airline tickets—they sold 4.6m tickets to fly that year but only booked 1.7m room nights and 1.8m rental car days. In contrast, almost all the firm's business is now hotels and vacation rentals. The company took reservations for 591m room nights, 47m rental car days, and 15m airline tickets last year. This change in product mix helped increase revenues as accommodation is usually the most expensive item on a per trip basis.

While the mix of services has changed, so has the business model. Two decades ago, the company almost exclusively operated as a merchant taking payments and trying to make a spread by completing the booking with the provider. Almost all the gross booking revenue flowed through Booking.com. However, in the early 2000s, they began switching to an agency model where they instead took a commission for bringing the reservation to the service provider. Under this model, little of the gross booking revenue flows through Booking.com; instead, they take a finder’s fee. These commissions increased from 0.1% of revenues in 2001 to 61% in 2021, after peaking in 2017 at 77%. As a result, the firm takes less responsibility for the booking, needs to process fewer transactions, and acts as a broker or agent rather than a merchant.

The shifting business model has meant that revenue as a percentage of total gross bookings has declined too. Their revenue structure has changed by selling rooms on a commission model instead of airline tickets on a merchant model. In 2003, 78% of the firm's processed gross bookings were revenue. This percentage dropped rapidly and has averaged 16% over the last five years—close to the standard 15% commission fee they charge.

As the company processes fewer transactions itself, it's registering less of that as revenue. Instead, it increasingly acts as a middleman between travellers and accommodation providers and takes a slice of the action. In 2021, 10% of all worldwide tourism revenue was booked through the company’s websites, up from 6% in 2017. The brokerage model is helping the firm process fewer bookings itself, expand more rapidly, and get a slice of more of the world’s travel bookings.

As the company grew and its business model changed, it became increasingly profitable. The increased scale meant fixed costs represented a lower proportion of the cost base, and the change in structure drove the cost of providing its services down. Consequently, the company is now highly profitable with enormous margins—the agency model is attractive. Gross margins, which were 16% two decades ago, have averaged 86% (!!) over the last five years. While on an operational basis, the company has gone from not being able to make a profit to averaging 28% EBIT margins. Although high, these margins are not as high as they were pre-COVID. In the five years before 2020, these profit margins were 94% and 36%, respectively.

Booking.com has an efficient and lucrative business model, but they are not alone in the industry. Many other companies operate similar services, but this company does it better. Of the 97 global travel and tourism booking companies I sampled, Booking.com’s gross and operating margins, over the past five years, were in the top 10% and 6%, respectively. The firm has a competitive advantage driven by its scale and the network effects that brings.

The decline in the cost of revenues as the firm’s sales became increasingly commission-based freed up money to be spent on marketing and sales. This helped to feed the network advantage that the business was building. According to the company’s website, they have 28m total accommodation listings, including 6.2m listings of homes, apartments and other unique places to stay. Airbnb, a rival focused on home rentals, sports 7m listings. This is more than the number of homes and apartments on Booking.com but a fraction of the overall accommodation options. Expedia, another rival, has just 3m lodging properties.

The scale of the company’s operation makes it a more attractive place for customers to look first. This result makes it increasingly tempting for travel service providers to list and advertise through them. And because of this, Booking.com can strike better deals and have more money left to spend on sales and marketing, further driving service providers and consumers to the platform. Currently, the company is spending 41% of its revenues on sales and marketing mostly on national advertising and customer loyalty programmes. This expense ratio is at the 86th percentile of the companies I sampled. Not only can the firm spend more on sales and marketing than five-sixths of its rivals, but more money still comes out in profit than 94% of them.

This business’s competitive advantage and agency model means less capital must be reinvested to grow than for its competitors. Booking.com’s business model is fantastic at turning invested capital into revenue. On average, $4.42 of sales have been generated for every dollar invested in operating assets over the last five years. This ratio puts it in the top 5% of companies I sampled. The resilience and efficiency of the business model were especially highlighted during the pandemic and subsequent bounce-back as they could quickly scale down and up their operations.

Story and valuation

> A titan of the global tourism booking industry, Booking Holdings Inc will look to acquire other small websites and bring them under its umbrella. The firm enjoys robust network effects powering incredible unit economics and helping it take a slice of a tenth of all global tourism bookings. The industry was walloped by the pandemic but will continue to rebound. It is likely to return to its pre-pandemic trend within a few years. Inflation is high, and interest rates are rising. Consumers whose wallets will be squeezed will become increasingly frugal; this benefits Booking.com as travellers hunt for the best price online. Starting a dividend or acquiring a company like Trainline, Webjet, or Seera could catalyse the value revelation here.

  • Gross bookings growth: Statista forecasts the global tourism market to grow at 18% per year until 2026 as borders reopen and travel returns to pre-COVID levels. Inflationary pressures will increase ticket and booking prices, weighing on demand. A recession will be a drag on demand as interest rates rise and consumer credit dries up. Still, list price hikes will offset some revenue lost to demand destruction. Online booking companies will benefit from this. As consumers' wallets are squeezed, they'll become increasingly frugal and shop around using comparison websites. Last year, Booking Holdings took 10% of gross tourism bookings. I forecast this to rise to 12% by 2026 as their leading scaled position, and network advantages extend their lead over their competitors. Moreover, by continuing to grow the airline ticket business and acquiring small competitors, they'll increasing capture a larger share of newly higher flight prices. I forecast the company's gross bookings to grow at 22.3% over the next five years and for them to take 12% of the $1.7trn of global tourism bookings in 2026.
  • Commission rate: The firm's commission rate has declined as the business model has changed. Currently, they're charging 15%. The company's leading position and network advantage will help them defend this fee, even amid inflationary pressures. There will be pressure from hotels and vacation rental managers to lower it as costs rise, but Booking.com has the upper hand as these businesses can't afford to lose revenue. I forecast the commission rate to trend from 14% in the trailing 12 months to 15%.
  • Revenue growth: I model revenues to rise to $24bn in three years, $38bn in five, and $63bn within the decade. The implied five year growth rate is 25% per year, slightly higher than the 24% rate for the 32 analysts following the company.
  • Profit margins: Booking.com will face cost inflation, but it won't be problematic. The commission structure means that as travel service providers' prices rise, the company's commission does too. Salaries, sales, marketing, and administrative costs will all increase. Still, the firm's cost of revenues will continue to normalise towards pre-pandemic levels. The company’s scale and network advantage will drive fixed costs, including marketing and admin expenses, down as a proportion of revenues. I forecast the company's EBIT margins to rise to 30%, the average of the last decade and better than 95% of its competition. The critical risk is that airlines and large hotel chains refuse the agency agreement and want the company to either bulk purchase or buy at a discount and onsell under a merchant deal. This, however, seems unlikely as hotels and airlines become increasingly revenue conscious through the inflationary recession.
  • Taxes: The company doesn't break down the regions and countries its revenue comes from. But as it operates across 220 countries, I've assumed that its geographic segments are in proportion to the GDP of each country, and my estimate for the firm's underlying marginal global corporate tax rate is 23%. The firm is sitting on $225m of net operating losses it will offset against its tax bill over the next year.
  • Reinvestment: Booking.com will continue to expand its offering, bringing in new vendors and expanding into new services. They will continue to acquire smaller competitors in niche spaces. It wouldn't surprise me if companies like Trainline, Webjet, Seera, or Easy Trip Planners, were in their crosshairs. Over the last five years, the firm has produced $4.42 in revenue for every dollar of capital invested. Over the previous 12 months, this rose to $7.30, much higher than the industry median of $0.71. I forecast for Booking.com to get $4 of revenue for every dollar they reinvest as their growth combines acquisitions and organic expansion. Based on this, I predict they'll pour $6.3bn into growth assets over the next five years but will have no problems finding it from profits and their existing cash pile.
  • Free cash flows: Based on the above, I forecast the business to be free cash flow generative. The bosses should use this excess cash to either start a dividend or buy back more shares (at the right price).
  • Cost of capital: The firm is a global hotel, airline and restaurant booking business. It doesn't break down its geographic regions, so, as with the tax rate, I have assumed its country risk will be proportional to the GDP of every country. I estimate the firm's unlevered beta to be 0.8 and the global equity risk premium to be 7.2%. Moody's has assigned the firm an A3 credit rating. I've gone with this and attributed the chance of distress within a decade at 1.4% based on historical default data from Standard and Poor's. The firm's debt to equity ratio is 13.5%. I estimate the company's cost of equity, in dollars, is 9.6% and the pre-tax cost of debt to be 4.8%. As a result, the firm's cost of capital is 8.9%.
  • Add non-operating assets: Booking.com has $2.2bn of investments carried at fair value and almost $10.6bn of cash and equivalents.
  • Less debts and unfunded liabilities: The company owes $10.1bn to creditors and landlords, and 136,000 employee options are outstanding, which I've valued at $112m. I found no unfunded litigation liabilities or defined benefit pension schemes.

Each share has an intrinsic value of $2,885. At the current price, $1,735, the investment has a 66% upside.

Sensitivity analysis and rating

Monte-Carlo Simulation is used to model uncertainty by assuming that the inputs to the valuation model will come from probability distributions around the estimates.

The price of Booking Holdings Inc (NASDAQ: BKNG) common equity is $1,735 and is at the 15th percentile of the Monte Carlo sample of intrinsic values. For this reason, it has a rating of Add.

I did not already own the stock but am building a position.
sam stribling's avatar
Great stock pick! My wife is in hospitality and “Revenge Travel” as they are calling it from Covid should continue to keep the sector strong even in a downturn.
Edmund Simms's avatar
@strib I've been revenge travelling for the past six months! Before keep going to stimulate my own stock picks.
sam stribling's avatar
@valuabl haha ohh I have been too and I do the same thing for my stocks lol I’ll go out of my way to buy a product if it’s in my portfolio.. even to the point where I may have spent more than my investment in some names.. 🫣
Edmund Simms's avatar
@strib When you travel, do you book direct, or go through a platform like $BKNG or $ABNB?
sam stribling's avatar
@valuabl I have used both in the past! That said, often times I book direct as I stated above my wife works in hospitality so if it’s a property that her company owns/manages we book through that (can’t beat employee rates!)
Edmund Simms's avatar
@strib Tough to beat an employee rate! You don't have to say who she works for, but does her firm advertise through any platforms? Or are they big enough to have plenty of guests find them?
sam stribling's avatar
@valuabl no I don’t mind at all. It’s actually on the hotel management side. It’s called Valor Hospitality. What they do is operate hotels in a portfolio (some owned by them others just managed) but the properties themselves vary. They have exposure to the major brands like IHG, Marriott, and Hilton as well as some lesser known boutiques.
Investor from Nepal 🇳🇵's avatar
@strib love the term "revenge travel"!
Edmund Simms's avatar
@strib Valor looks like an interesting business. They're massive, too—even have sites across Europe and the UK. Valor lists their sites on Booking.com. I went through and found a dozen of the UK sites.
sam stribling's avatar
@valuabl excellent! I’ll have to ask my wife is she works on that part of the marketing!
Edmund Simms's avatar
@strib It would be great to get her insights. Can't wait to hear!
StockOpine's avatar
Oh no @valuabl ! We were expecting this given your recent tweets but we hoped that you will change your mind.

In any case, tomorrow we will be releasing our memo on $BKNG as well but we will avoid reading yours until we post it to avoid any confirmation bias. 😀

Pros: at least someone agrees with us
Cons: tougher competition
Edmund Simms's avatar
@stockopine can't wait to see it! It will be great to see where we agree and disagree.
Chip Lunderburg's avatar
@valuabl Would love to hear you both pick one thing from the other's analysis that you feel like you missed 🤓
Conor Mac's avatar
@valuabl @stockopine Reading this actually reminded me that @stockopine have done some great work on these two names as well. Can't wait to read that too, but great job Edmund!
StockOpine's avatar
Indeed @investmenttalk . We just released our thesis and analysis.
StockOpine's avatar
@valuabl just finished reading this. Great pitch and interesting valuation story. You are slightly more optimistic than us but this mainly has to do with the cost of capital used.

In respect to the agency Vs merchant revenues the vibe we are getting is different as they started to increase it again (from 19% in 2016 of sales mix to 34% in 2021 and 39% in Q1'22). It also seems that take rate is higher on merchant revenues. In the latest call, Glenn Fogel also stated that 34% of gross bookings were processed through their payment platform (highest quarter).

Our take is that they do this to attract hosts of alternative accommodation.
StockOpine's avatar
@chip_lunderburg Nothing material we would guess (both of us covered the bulk of the story) but please check out our release and let us know of your thoughts.
Edmund Simms's avatar
@chip_lunderburg That's a great idea, Chip!

@investmenttalk Can't wait to tuck into @stockopine's thesis either.
Edmund Simms's avatar
@stockopine, our valuation assumptions are similar. Does this mean we're on the right track, or have we inadvertently fallen into a groupthink trap?

For my cost of capital calculation, the equity risk premium (ERP) I used is my estimate for the market's current one. I value the S&P 500 each fortnight and back the forward-looking ERP out of that. This premium takes into account the market's recession expectations. If I were to manually bump it, as you have wisely and conservatively done with your method, I would be double counting with mine. That would be a mistake for my process.

How do you see the company's focus on agency versus merchant revenues evolving over the next five to ten years?
StockOpine's avatar
@valuabl clear. our estimated WACC are very close (8.9% & 9.3%) but preferred to go with our minimum required return. Hard to say but likely to see a shift in merchant.
Joey Hirendernath's avatar
Incredible effort Edmund, really enjoyed this. I had seen your comment in response to someone asking about the valuation at Airbnb. You said:

"Of the three ($ABNB, $EXPE and $BKNG), Booking.com is offering the best excess return in my view."

Does this mean you would own Airbnb if this price was right?
Edmund Simms's avatar
@joeyhirendernath I'm glad you enjoyed it. It's an incredible business.

I would definitely buy $ABNB at the right price. In fact, at the right price I would own almost any business. Price is the key determinant for me.

Do you use any platforms for bookings when you travel? If so, which ones?
Jeff's avatar
Nice write up. Curious your thoughts on $EXPE here. Smaller in size forward pe like 8 and has vrbo.
Edmund Simms's avatar
@jkess54 I think Expedia is slightly undervalued here based on analyst consensus estimates. I value $EXPE at $97 per share. Their struggle is profitability. Operating margins peaked in 2010 and have declined ever since.

Do you prefer $EXPE to $BKNG?
Jeff's avatar
Thanks. I don’t know enough honestly. I was looking it as an alternative to Airbnb a few months back when Airbnb was at highs and seemed expensive.
Edmund Simms's avatar
@jkess54 I valued $ABNB at $78 per share back in March. Airbnb has seemed overvalued to me for a while. Of the three ($ABNB, $EXPE and $BKNG), Booking.com is offering the best excess return in my view.
Leandro's avatar
Great writeup! Always nice investing in companies that we use for things such as travel! Makes the investing process much more enjoyable!
Edmund Simms's avatar
@invesquotes Thanks, Leandro.

Out of curiosity, do you use any platforms to book when travelling? Both Airbnb and Booking.com are great here in Europe. But sometimes I will use them to search for accommodation and then message the host directly.
Leandro's avatar
@valuabl I use both Airbnb and Booking although I must say I use Airbnb more because I typically look for apartments and I feel the offer is better on Airbnb.

I have never disintermediated them though, is it easy to do?
Edmund Simms's avatar
@invesquotes I've never done it for houses or apartments, but I have for hotels. Unless I had already stayed with the host before, I wouldn't feel secure going direct to a house/apartment.

Like you, I use Airbnb more because we look for houses or flats. But the quality/price ratio of Booking.com's offering has dramatically improved over the last six months, and our last few have been through them.

When visiting your beautiful city of Madrid, my wife's Airbnb turned out to be a scam, which put us off (the platform, not your city) for a while.
Genenvieve Y's avatar
switching to an agency model has helped booking.com increase their profit margins, but now it seems their only competitive advantage is through their dominance of the network effect. By making themselves meerely a middle-man does this leave them vulnerable to competition that adds just a few extra features, or to merely being used by consumers as a search engine when they become cluey that they can then book directly with hotels for better rates?
Anecdotally, that's how I've started using booking.com!
Edmund Simms's avatar
@geny They're undoubtedly vulnerable to new or existing services that cater to specific niches. Companies like Trusted House Sitters (pet sitting), Tongcheng (Chinese transportation tickets), MakeMyTrip (Indian travel bookings), or WebJet (Australian airline tickets) all offer localised or niche services. It's hard for a large company like Booking.com to move into a small or regional niche when an existing solution, with plenty of options, is already in place. I expect they'll look to acquire smaller companies like these instead of building those services.

We're in the same boat there. I've also used Booking.com as a search engine for hotels and then booked directly. No matter what, booking platforms that connect consumers with large businesses will always struggle with this. This is less of a problem for Airbnb as consumer protection and the host's ability to take payments are paramount—large hotel chains don't have this problem. I wouldn't be surprised if Booking.com tried to strike price matching agreements with larger chains to prevent this.

Booking.com will need to compete on range and convenience. It must be easier to find what you're looking for and book through their service than to go direct. If it's not, an increasing number of people will circumvent the platform.

Have I misunderstood what you meant?

Do you prefer to use $BKNG or $ABNB (or another) when travelling? What would Booking.com need to offer in order to make it attractive enough for you to book through the platform rather than going to the hotel directly?
Genenvieve Y's avatar
@valuabl thanks, no that's exactly what I was trying to get at! Great response, I agree. Doesn't make them a bad investment by any means but was interested in your view on the future of the business as this is no doubt taken into account in your valuation.

I find booking.com's website to be overly busy and almost intentionally confusing, constantly bombarding a visitor with pressure to lock that price in now. This clearly works for them now but I do wonder if it hurts them long-term from a convenience and ease of use perspective. So, I prefer Airbnb usually although I check both just in case one has a better deal!

I think booking.com offering some consumer protection like Airbnb does would make it more worthwhile and add value that booking directly with the hotel doesn't offer.

Another thought- With the cost of living squeeze and potential upcoming worldwide recession, do you think this will affect tourism and therefore booking.com's profits? Is that threat taken into account in your valuation?

Edmund Simms's avatar
@geny Booking.com has an advertising segment where you can pay to get your listing boosted. Like other online agency-based businesses, the website aims to get bookings—Booking.com is highly effective. I am with you on the consumer protection front. But I imagine there is a reason they don't already. Would you switch if Booking.com offered some kind of protection and made the website more streamlined, Airbnb style? I've found that Booking.com has become cheaper since Airbnb introduced automated surge pricing.

Yes, the uncertainty posed by an increasingly likely recession is included in the current equity risk premium estimate and the tempering of growth expectations. One of the beautiful things about the $BKNG's business model is it is mainly commission-based. As prices rise, Booking takes a slice of that larger price.

Households becoming stretched as interest rates and consumer costs increase will likely travel less and become more frugal. This is a relative win for Booking.com as these potential travellers search for better deals and use comparison platforms.

The company also has industry-leading margins. As costs rise and hosts and consumers become more frugal, the company is best placed to deal with those challenges, given the flexibility of its business model. Companies with low-cost structures and high gross profit margins are best placed in an inflationary environment. Booking's gross profit margins averaged 86% over the past five years—that's enormous.
Genenvieve Y's avatar
@valuabl thanks for your patient reply I really appreciate it! That's interesting, as prices go up booking.com's fee goes up in proportion. But, as prices go up demand will go down. Seems like the perfect equilibrium!
Also thanks for the really clear graphs and charts in your post. Really helps explain it to a newbie like me 😊
Edmund Simms's avatar
@geny Yes, and as the business has few fixed costs, it can maintain its profit margins if prices and demand decline.

No worries, Gen. I'm glad you enjoyed it. Thanks for sharing your thoughts and questions.
Great pick @valuabl ! I’ve long been a fan of the Booking.com business and your analysis only further backs that up.
Edmund Simms's avatar
@mgre67 Thanks, Michael. Do you use any booking platforms when you travel?
Great analysis @valuabl! Booking.com’s strategy to acquire a number of smaller comparison sites is interesting. Do you think this will help them take market share away from Airbnb, or will they continue to differentiate themselves with “you get what you book?”
Edmund Simms's avatar
@mjohnson Yes, I think it will help take market share away from them in the broader travel market. However, I reckon $ABNB will remain the king of the short-term house and apartment rental market.
Zack Morris's avatar
Great write-up! And, I stole your format at the top for my own pitch ;)

Question. You write:

Revenue growth: I model revenues to rise to $24bn in three years, $38bn in five, and $63bn within the decade. The implied five year growth rate is 25% per year, slightly higher than the 24% rate for the 32 analysts following the company.
I see consensus estimates at $26bn in 5 years (2026), or a 19% implied revenue CAGR off of 2021. I use tikr.com to get my estimates.

Do you see different consensus estimates? If not, can you explain why you think 2026 revenue will be $38bn while consensus (that I see!) is at $26bn?

Also, I noticed you've asked a lot of people in the comments what platforms they use to book travel so I'll include my two cents here. I default to Airbnb (I live in the US, for context). Airbnb used to be the cheapest alternative, and now sometimes still is but more so I have just formed the habit of staying in an Airbnb and generally prefer the rented house vibe to the hotel vibe.

My primary experience with Booking was a few years ago when I did a week-long ~100 mile hike in Scotland along the West Highland Way. Me and my partner would look to get a place to stay each night and after a couple nights we quickly learned that Booking had the most (or only!) options listed in the small little towns we were passing through. By the end of the trip, we were going directly to the Booking app each night to search for and book our next night's stay.

However, I'll echo a point I made on @stockopine 's $BKNG pitch. When I'm traveling around the states:

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.

Perhaps it's a function of my demographic, but most people I've talked to report the same experience/habits.

I'm also going to loop you in to a comment/question I made on @stockopine 's pitch since it seems like you might have some insight.

The question is, why has Booking been able to generate such massively higher margins and ROIC than Expedia over the years? From reading your pitch, I sense it may have something to do with the transition from the merchant to the agent model? But I'll admit I don't understand what's going on here. Help!
Edmund Simms's avatar
@zmo, I'm chuffed you decided to use a similar structure for your summary section. I am excited to check out your pitch.

No, the consensus estimates are the same. I made two assumptions: first, the company will take market share, and second, its commission rate will rise to 15%. In contrast, a 19% growth rate assumes that the company will not take any market share, nor will its commission rate rise from its currently depressed level. This view is more pessimistic than my own.

Over the past five years, Booking's market share has risen from 6% to 10%. It seems unlikely that it will stop expanding this, especially given how greedy the firm has been over the past five years and how much free cash it produces. An inflationary recession will help Booking.com relatively more than anyone else in the industry as they're the biggest and most profitable. But the range of possible growth outcomes is vast and small changes in the expected market share alter the growth rate substantially.

To capture this sensitivity, my simulation of the growth rate used a distribution with a wide spread of samples.

Using the consensus five-year growth rate yields a value of $2,330 per share. The stock is still undervalued at that level, but not as much.

Those insights are fascinating. Thanks for sharing them. Your approach and experience mirror mine and many others. I see this market splitting in two:
  1. Generalists like Booking.com, and
  1. Geographic or service niches like Airbnb (short-term house rental), Trusted House Sitters (pet sitting), Tongcheng (Chinese transportation tickets), MakeMyTrip (Indian travel bookings), or WebJet (Australian airline tickets).

Expedia has a profitability problem. EBIT margins peaked in 2010 at 22% and have only declined since. They suck at making money because they are mainly a merchant and lack Booking.com's scale, network effects or brand awareness. Two-thirds of their revenue comes from merchant sales, while it's a third for Booking. Expedia only has 3m lodgings listed, while Booking has 28m. From the customer's perspective, these companies are both generalist tourism booking aggregators, except one has almost ten times the number of options.

Consequently, they must spend a lot on sales and marketing to get people onto the site. Over the past decade, they spent 50% of their revenue on sales and marketing, while Booking spent just 40%. Expedia's marketing efforts are necessary to keep them running in place while Booking's helps them grow.
HarrietL's avatar
That 10.1 billion dollars in debt looks spicy. Any concerns over these ever-increasing interest rates blowing that debt burden out? Or, can they pay it back fairly easily since they're making so much cash?
Edmund Simms's avatar
@hazzlaw While $10bn sounds like a lot, it's not a problem for them. They have more than that in cash, and bring in more than ten times their interest payments in operating profit each year. Instead, the problem with rising interest rates is how it impacts consumer demand. As rates rise, households can't afford to borrow as much and will spend less. At a higher interest rate, it's difficult to rationalise sticking the holiday on the credit card and worrying about it later.

I know you prefer using Airbnb. What would it take for you to use Booking.com instead?
HarrietL's avatar
@valuabl Ah, that all makes sense. So interest rate rises affecting how rich customers feel may affect demand. And if house prices fall too, I suppose, as you've also been writing about.
I do use booking.com when it's the best deal. I used it last year when we were still in the depths of lockdown uncertainties because they offered free cancellation and no need to pay until at the property. Airbnb would never be so relaxed! But, Airbnb does generally win over when I want a kitchen.
Edmund Simms's avatar
@hazzlaw While falling house prices are problematic for how wealthy consumers feel, it creates an inventory uncertainty problem for $ABNB.

If prices decline substantially, owners of empty second and third homes will become more inclined to lease them out. This adds to inventory. On the other hand, if prices fall far enough, housing will become affordable, and new buyers will enter the market, freeing up leasehold capacity. This will create a glut of houses on Airbnb and decrease short-term rental prices, putting pressure on hotel prices.

As Booking.com operates across hotels and vacation homes, it will be less impacted by this than companies like Airbnb.

Thanks for sharing your perspective. Your strategy mirrors many others here.
Another valuable and well written piece from Edmund. I will be following BKNG for the coming weeks.
Edmund Simms's avatar
@aaronedmund Thank you, Aaron. That's kind of you to say. Do you using any booking platforms when you travel?