BKNG 3Q Results

Current Price: $1,783      Target price: $2,400

Position Size: 1.8%          TTM Performance: -12%

 

 

Key Takeaways:

·       Beat on revenue, missed on EPS.

·       Demand improved throughout Q3, but weakened meaningfully beginning in October w/ Covid resurgence in Europe. Strongest trends were w/ domestic driving travel and alternative accommodations (e.g. home rentals). Alternative accommodations were 1/3 of booked room nights.

·       Cost cutting continues which should aid margins when demand environment improves.

·       Weak environment strengthens their position w/ suppliers as they are a key source of demand. Demand mix shift away from business towards leisure benefits BKNG’s leisure focus.

 

Additional Highlights:


·       CEO said Q3 benefited greatly from some lifting of government lock-downs and the release of pent-up demand created by the almost complete cessation of travel during parts of Q2.  However, COVID-19 case counts are now rising steeply in many parts of the world with corresponding increases in lock-downs and re-imposed travel restrictions that will continue to impact travel in the near-term.
·      Revenues for Q3 were $2.6B (-48% YoY) vs $2.5B consensus. While they missed on EPS, there were some adjustments including an unrealized gain on marketable securities and an impairment charge for OpenTable and Kayak goodwill. 
·       Q3 bookings were $13.4B (-47% YoY vs. -91% in Q2), slightly below consensus. 
·        Improving trends in Q3 – Room nights declined -43% YoY and ADRs declined -8% YoY ex-FX. This is an improvement from Q2 when room nights booked were down 87% YoY. They saw a surge in demand when travel restrictions and stay-at-home orders eased. 
·        Weakening results in Q4 w/ resurgence in outbreaks – The YoY decline in reported room nights was relatively consistent each month of Q3, as the steady improvement in global trends that they saw from April through July, flattened out in August and September. In October reported room nights declined by about 58% compared to October 2019. And over the last 7 days through yesterday, declined by about 70%. Worsening result is driven by increased virus infections and certain governments re-imposing public health-related restrictions. 
·       Weak guidance – “Given the trends we are currently seeing, we believe that year-over-year room night declines will be greater in Q4 than what we observed in October. If this turns out to be the case, it will be very challenging for us to reach profitability in Q4.”

·       Strength in domestic travel – booking trends were primarily driven by domestic travel with international trends seeing much more limited improvement. Domestic business benefiting from prohibitions/restrictions on international travel, which forces consumers who want a holiday to travel domestically. Note that “domestic” is just intra-country, so travel between countries w/in Europe is international.

·       Connected trip is a long-term growth driver – The long-term vision for them continues to be the “connected trip.” The idea is to be a platform for not just hotel, but a portal for all aspects of travel including flights, activities, restaurants etc. A key part of this is building up the “supply” (e.g. tour operators). The current environment could be a catalyst for supply as weaker travel trends spur suppliers to look to Booking as a necessary source of demand. They continue to invest behind this despite the current environment including their payment platform which enables payment to companies like tour operators through their platform. They recently announced the launch of flights on Booking.com in the US.

·        Cost cutting and improved marketing efficiency likely to lead to profitability recovering before top line does. Big headcount reductions with more to come. Also cutting marketing expense which is the biggest part of their cost structure – typically ~30% of rev. This is an important lever for cutting costs. As direct traffic grows as a % of bookings (over 50% now and increasing), this is an area where margins can structurally improve over time.

·       Regulatory Risk – New regulatory framework that the European Commission is working on (Digital Services Act)  will focus on “gatekeepers.” The focus is on big tech platforms – BKNG could potentially be included in this. The implications are not yet clear. BKNG feels designating them as a gatekeeper would be a mistake as they do not have the dominant market share of other “gatekeepers” like Google. BKNG puts their market share of bookable room nights in Europe at 11%. 

·       Stock is cheap and expectations are reasonable. Trading at almost a 5% yield on 2021. Consensus is for revenue not to recover to 2019 baseline until 2023. Consistent w/ mgmt. commentary that it will be years and not quarters before the travel market returns to pre-COVID volumes.

 

 

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

$BKNG.US

[category earnings ]

[tag BKNG]