Current Price: $1,737 Price Target: $2,400
Position Size: 2.6% TTM Performance: -6%
Key Takeaways:
· Slight miss on revenue, beat on EPS. While revenue was below consensus, it was ahead of the high-end of their guidance.
· Weak guidance: disappointing Q1 guidance driven by a weakening European market (the vast majority of their revenue) and higher ad spend.
· They have a track record of conservative guidance – they almost always come in ahead of the high end of their bookings guidance on a constant currency basis.
· Europe softening – they witnessed a slow start to the year, primarily in their core European markets, which they believe is largely due to overall macroeconomic factors. Average daily rates were a little weaker than expected and they guided to a meaningful deceleration in room night growth.
· FX headwind is expected to be significant this year. Current rates assumed in guidance reduces gross booking growth, revenue growth and non-GAAP EPS growth by 250 bps for the full year and 500 bps for the first half.
· Investing for growth: this will compress Q1 margins by ~350bps and reduce their full year EBITDA growth by a few percentage points. This reflects increased spend on brand advertising, customer acquisition and incentive programs and spending to support their new payment platform. They are investing in a payment platform that supports non-hotel properties, and will facilitate growth in transport and local attractions business.
· 171 million worldwide room nights booked in Q4, up 13% YoY and ahead of the high-end of guidance.
· Gross bookings of $19.6B were a little lower than expected (+13% constant currency) a slight deceleration from +14% last quarter.
· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. For the first time they disclosed revenue for this business – it now makes up 20% of revenue. They also said 40% of Booking’s active customers booked an alternative accommodation property at some point during the past 12 months.
· Growth vs. margins: They have been trying to “optimize” ad spend for several quarters by spending less on performance advertising (e.g. Google AdWords) and more on brand advertising (e.g. TV commercials). The idea is that brand advertising drives direct traffic to their site, resulting in a higher ROI. This ad spend/rev growth algorithm will continue to be a focus going forward as clearly the trade-off between growth and spend persist.
· Direct channel mix increased again (“well over 50%” of booked room nights). Probably not a coincidence that they now say over 50% of their bookings come from mobile devices, as mobile traffic is more likely to be direct (via app).
Valuation:
· They continue to generate solid FCF with growing FCF margins. Produced $4.9B in free cash flow for the year, +12% YoY.
· They returned about $1.8B during Q4 through share buybacks. Since the start of 2018, they reduced their fully diluted share count by ~6%.
· The stock is still undervalued, trading at over a 6% forward FCF yield.
Thesis:
1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.
2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:
· Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
· They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
· Strong position in China/South East Asia via Ctrip and Agoda
3. Booking’s addressable market is growing driven by: 1.) Alternative accommodations 2.)
Increased penetration (growth of mobile/internet) 3.) Global growth of travel spend > GDP.
4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.
$BKNG.US
[tag BKNG]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
PLEASE NOTE!
We moved! Please note our new location above!