Current Price: $1,945 Price Target: $2,400
Position Size: 2.5% TTM Performance: -1%
Booking is trading up after reporting better than expected results – a relief especially given EXPE’s report yesterday. BKNG reported in-line gross bookings and better than expected room night growth. While guidance was below consensus, they have a track record of guiding conservatively. Expedia’s earnings miss was on higher ad spend, however BKNG’s ad spend was >200bps lower as a percent of revenue YoY, which is reassuring given their better than expected room night growth. So, EXPE needed to spend more than expected on advertising to beat on room nights while BKNG spent less. They do however face the same pressures from Google that Expedia faces –this has been a theme for many quarters as they try to improve ROI on ad spend and try to get more consumers to their site directly. BKNG does have some structural advantages to EXPE including their focus on the more fragmented European lodging market which leads to higher take rates. They also have higher productivity on ad spend – this is driven in part by higher travel frequency in Europe which leads to more direct traffic and also by having fewer brands/banners than EXPE which results in less efficient ad spend.
Key Takeaways:
· Gross bookings growth was +7% constant currency. Guidance was for +3-5%.
· They booked 223 million room nights in 3Q, up 11% YoY. Guidance was for 6-8% growth constant currency.
· ADR headwind: industry occupancy is peaking and ADR’s are weakening as the lodging cycle matures. Lower ADR’s will be a cyclical headwind as revenue is a % of room revenue. This will impact them more than in past cycles as secular growth is slowing with higher penetration..
· Guidance: Management provided Q4 guidance below consensus with bookings growth decelerating to +4% YoY at the high-end of the range.
· Total ad spend declined~233bps YoY as a percentage of revenue, with direct traffic growing faster than pay channels.
· What’s driving advertising spending issues? The driver is less efficient search engine optimization (SEO). SEO refers to where their sites fall in rankings based on search results. The goal is to be at the top and get organic (free) traffic. They also advertise to get traffic. Both EXPE and BKNG spend a ton (>30% of revenue each) on advertising to drive revenue. The goal is to get more direct (go to the app or directly to the website) and/or SEO traffic to the site. The problem is that Google has reformatted how search results show up (a box appears ahead of listed results) which drives traffic to their own sites (this is a source of antitrust scrutiny) and pushes BKNG’s and EXPE’s sites lower in the search results. The consequence of this is exacerbated on small mobile screens, where an increasing amount of the traffic comes from. Yelp has been a vocal critic of Google’s behavior on this same issue.
· Alternative accommodations: “growth outpacing the overall business.
Valuation:
· Repurchased $1.4 billion of stock in Q3 – $13 billion outstanding under repurchase authorization – expect to complete this authorization in the next 2-3 years assuming stable business and market conditions.
· The stock is still undervalued – trading at ~6.5% FCF yield on 2020.
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