Editor’s note: Seeking Alpha is proud to welcome Matthew Shedden as a new contributor. It’s easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA PREMIUM. Click here to find out more »
The recent strife of the travel & tourism sector, caused by COVID-19, has been torrid. Outside-in, Booking Holdings (BKNG) seems like a compelling bet on a global travel recovery for the following reasons:
- Dominant position, globally.
- Low-cost, high-margin business model enjoyed by online travel agencies (OTAs).
- Respected platforms, and a proven ability to pivot focus to top performers.
- Long-term tailwinds within a downturn-resilient sector.
- Strong financial position covers COVID-19 costs and enables inorganic growth.
In the short-term, it is unquestionable 2020 will be bad for BKNG. Yet at ~$1,600, there is little room for error should a worst-case scenario occur. Long-term sector tailwinds may not correlate with a sustained competitive advantage. Competition from Google (GOOGL) will erode its Western business which its Asian-orientated unit, Agoda, will struggle to offset.
Business Model Overview
Figure 1: BKNG revenue streams and sales performance. Source: Created by author using data from 10-Ks and 10-Qs.
As an OTA, BKNG segments its revenue into three distinct categories:
- Agency Revenues: Travel reservation commission only.
- Merchant Revenues: Travel reservation commission w/ payments, fees, etc.
- Advertising & other revenues: Advertising, referrals, and management services (OpenTable).
Booking Holdings’ portfolio of businesses is as follows:
- Booking.com: The pièce de résistance. It is the #1 travel platform across USA and Europe.
- Agoda: Ranking #4, as market leader in East Asia.
- Rentalcars.com: #1 platform-only – unlike Enterprise and Hertz (HTZ) – car rental aggregator.
- Priceline.com: The once flagbearer of aggregators, focussed on US and Canada.
- KAYAK: Successor to Priceline.com. USA and China are top markets.
- OpenTable: Restaurant booking and management services in primarily USA and Canada.
Short-term: Aftermath of a pandemic
As Glen D. Fogel, CEO of Booking Holdings, remarks:
I believe the COVID-19 virus will impact global travel more than the 9/11 terror attacks, the SARs epidemic and the 2008-2009 Global Financial Crisis combined.
Fear-inducing, right? In reality, this statement says very little. Modern tourism has shown remarkable resilience to past shocks. This is shown by tourism-related impacts of past events. Firstly, the September 11th terror attacks were a 1-day event created uncertainty of global travel, using aeroplanes. The sector mostly recovered with one year, but NY tourism took longer. Next, considering the 2002-2004 SARS Outbreak; this was a multi-year regional outbreak. Yet, Chinese tourism was not globally significant, accounting for 3.2% of all spending vs. 20% today. Considering the Global Financial Crisis, sector ramifications were felt later, however growth returned in 2010. Finally, the 2004 Indian Ocean Tsunami best matches COVID-19, in terms of an initial shock followed by a recovery period. Here, almost all nations within the region recovered by 2006. Worst-hit Indonesia saw visitations return by 2007.
Figure 2: Variation in online traffic of select travel websites. Source: Created by author using data from SimilarWeb.
Back to 2020. Figure 2 highlights regional recoveries. Traffic to HRS.de suggests a Northern European rebound, whereas persistent South American struggles are indicated by continued declines to Despegar (DESP). A bright spot for BKNG will likely be Rentalcars.com, who benefits from short-term declines in public transport usage.
Yet, the short-term outlook for BKNG remains choppy. Average visits are still down 70% since January (Figure 2). Most sales stem from hard-hit USA and Europe, which Morningstar predicts will not share a Chinese-style rebound. Moreover, consider the seasonality of booking periods. Vacations are normally booked 100-150 days in advance, implying – under normal circumstances – vacations up to September should be mostly accounted for. Heavy sector discounting will spur some holidaymakers, but the importance of 1H sales remains undeniable.
Valuation in the short term
Short-term assumptions made to arrive at this valuation are as follows:
- Bull: 2020 revenues decline 40%; 2019 revenue recovers in 2021.
- Base: 2020 revenues decline 52.68%; 2019 revenue recovers in 2022.
- Bear: 2020 revenues decline 70%; 2019 revenue recovers in 2023.
To demonstrate, the Base scenario is explained. Widely agreed by analysts, Q2 sales will be worst-hit. Beyond, revenue declines will gradually ease through 2020.
Table 1: BKNG quarterly sales for 2019A and 2020E (Base). Source: Created by author using data from BKNG 10-Ks and 10-Qs.
BKNG and peers have been reluctant to issue forward guidance. As investors appear to be looking beyond 2020, 2021 forward earnings will be used to arrive at a current valuation.
Table 2: Multiples approach to valuing BKNG, today. Source: Created by author using data from Reuters.
The Base scenario used here accurately reflects the present valuation. To err on the side of caution, one should fear the worst and expect the Bear scenario. Thus, in the short-term I recommend to hold; and target BKNG at $1,370.
Long term: Weakened competitive advantage, uncertain growth
Like past crises, COVID-19’s impact can be separated into two hurdles to be overcome: the initial shock and the tail. Research by Wedbush points towards a multi-year recovery.
Long-term, the prospects of BKNG are tied to sector growth and competition. The exemplary track record of BKNG tells one story. “A rising tide lifts all boats” tells another. Sector growth is expected to continually outpace economic growth, as tourism becomes attainable to half of the world’s households by 2025. This extends the overall growth runway. Growth will mostly be attributable to Asia. Chinese dominance will continue – only 10% of the population are currently passport holders. To capitalize on this growth, BKNG must rely on their Agoda platform. Inorganic growth is also possible; buoyed by their healthy cash position – now exceeding 2019 earnings – and use of debt. Asian growth becomes particularly crucial to offset USA and Europe, where BKNG must contend with greater competition and a sustained COVID-19 impact.
Figure 3: BKNG revenue segmented by geographical reporting area. N.B. Location does not indicate where revenue is specifically drawn from. Source: Created by author using data from 10-Ks and 10-Qs.
In the past BKNG, alongside Expedia (EXPE) enjoyed a near duopoly in Western markets. However, Google and its service “Google Travel” have management(s) concerned, due to their ability to integrate travel booking seamlessly with pre-existing products (“Search” and “Maps”). Common demands of travelers are arguably better provided by GOOGL. Time is saved, as integration with Search reduces ‘clicks-to-book’. Secondly, Google has waived fees for struggling airlines and hotels; thereby GOOGL “gives me more options,” as businesses seek to reduce marketing costs. A further added benefit, is that a greater supply and reduced fees should be passed onto consumers. Hence Google Travel “saves money.”
Further, low switching costs mean Booking Holdings’ established presence provides little defence against the 2nd most valuable global brand. Such challenges are shown in the stagnating (declining) sales and valuation of BKNG. Possible antitrust regulations from Europe and limited penetration in Asia may help but investing in BKNG requires some certainty, not speculation.
Valuation in the long term
In arriving at a long-term valuation for BKNG, the “Base” short-term scenario will be used since this discounted cash flow (DCF) model is driven by perpetual growth and discount rate. Notable DCF assumptions are as follows:
- Tax Rate: Remains at 21%.
- Risk-free Rate: 0.70% (US 10Y T-Bill, 19/06/2020).
- Perpetual Growth Rate: 2.74% (50Y avg. OECD members GDP growth, 1968-2018).
- Perpetual Operating Margin: 35.00%, similar to FY2019.
- Discount Rate: 7.46% (WACC).
Table 3: Sensitivity analysis of DCF valuation of BKNG. Source: Created by author.
Whilst Asian sector growth will outpace economic growth, Agoda’s operations currently represent 12.23% of BKNG revenue. Thus, GDP growth is a conservative estimate. Using WACC as a discount rate reflects a sustained low-rate environment, and below historical-average returns. BKNG aligns with its long-term valuation using a conservative perpetual growth rate and discount rate. Thus, I continue to advise caution.
Pending the COVID-19 recovery, Booking Holdings’ valuation is optimistic about the future. Whilst obstacles differ in the short-term and the long-term, I question its overall valuation. In the short-term there is little margin of safety, should the travel recovery falter. My expectations align well with analysts’ consensus. Beyond, success demands growth in Asia to more than offset declines in “Meta-Search” platforms such as KAYAK and Priceline, whose competitive advantage is significantly lessened by new entrant Google. BKNG appears to be currently fair value. Risk, combined with paltry returns at its current valuation mean BKNG does not currently warrant investment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.