Business Model Concerns Outweigh A More Appealing Valuation

| About: Booking Holdings (BKNG)
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Investors take profits after issued soft guidance.

After the sell-off shares are more fairly valued.

Yet I remain cautious amidst concerns for the business model. (PCLN) released its first quarter earnings report, accompanied by relatively soft guidance for the current second quarter.

This gave investors a reason to take some profits off the table as shares are still trading with gains of more than 50% over the past year. This is despite a recent sell-off. While the valuation is becoming more appealing, I remain cautious given the concerns I have about the company's business model.

I believe that's margins are relatively fat, making it potentially vulnerable to competition or consumer might simply chose to book their bookings directly at the hotel.

First Quarter Headlines generated first quarter revenues of $1.64 billion which is up by 26.1% compared to the year before.

The company showed solid operating leverage despite an increase in the effective tax rate with net earnings coming in at $331.2 million, up 35.6% on the year before. As a result of slight dilution, earnings per share advanced a little less quickly, coming in at $6.25 per share.

Looking At The Operations

Total bookings came in at $12.28 billion, up 34.2% compared to last year. International growth continues to outpace domestic growth, growing at a rate of 36.8% versus growth of 19.5% for the domestic operations. As a result, international bookings make up nearly 87% of total bookings.

As has been the trend for a while now, bookings growth has outpaced revenue growth indicating pressure on the "cut" which makes on the bookings. Despite this commission compression takes an average cut of $13.30 on every hundred bucks being spent on hotels through its websites. This might be something to consider next time you book a night to stay.

An impressive 83.4 million hotel room nights were booked during the quarter. On top of this came 12.3 million rental car days and 2.0 million air tickets.

Cautious Second Quarter Guidance

For the current second quarter issued cautious guidance with gross travel bookings seen up between 22 and 32%. This should translate into revenue growth of 19% to 29%.

Non-GAAP earnings are seen between $11.22 and $12.02 per share which compares to non-GAAP earnings at $7.83 per share in the first quarter. All of this should translate into GAAP earnings between $9.67 and $10.47 per share.


As a result of the huge profits and the little capital expenditures required to finance the growth,'s cash balances have increased toward $6.7 billion. Total debt which consists out of potentially dilutive convertible debt stands at $1.9 billion, resulting in a net cash position of roughly $4.8 billion.

Assuming 24% annual revenue growth based on the projections for the second quarter, could generate revenues of $8.4 billion this year while earnings could come in at around $2.4 billion.

Trading at around $1,140 per share,'s equity is valued at $59.5 billion, thereby valuing its operating assets at roughly $55 billion. This values the business at 6.5 times annual revenues and 22-23 times earnings.

Takeaway For Investors

After shares have retreated nearly 20% from their all time highs around $1,380,'s shares offer a bit of appeal. A valuation at 22-23 times earnings is not excessive given the strong growth.

That being said, I have some concerns regarding the company's business model. For starters I believe that while growth is impressive still few consumers realize that they pay an average commission of 13 cents on the dollar when they book on one of's websites. These include the acquired and the hugely successful website besides of course

Competitor Expedia (NASDAQ:EXPE) takes an average cut of roughly 9.5%, reporting revenues of $1.20 billion on $12.6 billion in gross bookings during its first quarter. Assuming hotels ask the same prices before paying commissions to their intermediary, Expedia's offerings should be 3-4% cheaper on average compared to

As a matter of fact, I see signs that some people are starting to realize this and start to book directly on the hotel's website, often finding cheaper offerings. Consolidation in the hotel sector has been helpful as well. On for example I can find the prices not only for the namesake hotel chain but also for Conrad, DoubleTree and Embassy suites, among others.

It is also true that large hotel chains are making it easier for consumers to check prices directly on their website. As a matter of fact, the Dutch Advertising Code Committee said that's daughter is misleading its customers by suggesting that often there are just one or few rooms left. This creates an artificial supply shortage in order to induce consumers to make their bookings.

With growth expected to slow down a bit, but still come in at very respective levels, I am not in a rush to acquire shares at a fair valuation on the back of the worries outlined above. If's cut for example would fall from a current 13% to 10%, thereby being in line with Expedia's margins, its overall bookings would have to grow by 30% to generate the same amount of revenue, while margins would take a beating.

I will wait on the sidelines, awaiting better entry opportunities.

Disclosure: I 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.