Booking Holdings: Cheap And No Threat From Google Or Facebook For Now

|
About: Booking Holdings Inc. (BKNG)
by: Strubel Investment Management
Summary

BKNG is trading at its cheapest valuation in a decade.

Fragmented nature of international market provides a network effect.

Tech giants do not have the personnel resources to compete.

Booking Holdings (BKNG), formerly known as Priceline.com, is an online travel agency or OTA. The company owns a number of websites that allow users to book lodging, rental cars, and airline flights. It’s one of our holdings because we believe the company has a defensible economic moat despite fears of competition from the tech giants. The recent market downturn has made the stock the cheapest it’s been in years and it screens as one of the cheapest companies in our portfolio relative to future earnings potential.

Understanding What Booking.com Is and Is Not

One of the first things that investors should understand is that Booking.com has very little presence in the US. Over 90% of the company’s gross profit comes from its international operations. Additionally, a significant majority of its revenue comes from accommodations, not flights or car rental.

Thus, investors can pretty much safely ignore anything happening in the US market or with airlines or rental cars. The fact that airlines and hotels have significantly consolidated in the US over the last decade and are attempting to control customer acquisitions themselves is a non-issue for BKNG. Hotel chains attempting to reduce take rates (the cut the hotels pay BKNG) isn’t a story worth following for BKNG either. Likewise, the threat of car sharing services as an alternative to the traditional rental car model can be safely ignored as well.

Network Effect Means “Big Tech” Not a Threat at this Point

What may be viewed as the biggest threat are the two tech giants Alphabet/Google (GOOGL) (NASDAQ:GOOG) and Facebook (FB). Both companies operate highly popular websites that are usually the first destination for many on the internet. Indeed, one of the most watched metrics for BKNG is how much money it’s paying Google to appear in results when users search for accommodations, rental cars, or flights.

The fear is that since Google (or to a lesser extent Facebook) is the first point of contact for customers, the other companies can simply step in and dis-intermediate BKNG. It’s Google (and could be Facebook) that controls the funnel of customers to BKNG's online properties.

We think this is unlikely because of the network effects that BKNG has with its clients. The international hotel market is highly fragmented, and in order to replicate BKNG, another company would need to forge relationships with every independent hotel out there. It would be a very labor-intensive and time consuming process. Booking has approximately 24,000 employees (Expedia (NASDAQ:EXPE) has a similar amount as well). Now compare this to Alphabet and Facebook which are much larger companies by net revenue.

Company

Employees

Revenue (TTM)

Rev/Employee

Booking Holdings

24,000

$14,200,000,000

$591,667

Expedia

22,615

$10,980,000,000

$485,518

Alphabet

94,372

$129,870,000,000

$1,376,150

Facebook

33,606

$51,900,000,000

$1,544,367

(Source: Company filings, author calculations)

We can see just how labor intensive the OTA business is. BKNG and EXPE earn about one-third the revenue per employee that the tech giants do. Furthermore, Facebook simply does not have the staffing level required to compete with BKNG. In fact, as of last year, Facebook actually had fewer employees than BKNG. Remember part of what tanked Facebook’s stock in 2017 was its significant cost increases to deal with the various privacy and data issues it had. Part of that was the hire of an additional 10,000 employees over the last year. Google certainly has a large staff, but it’s difficult to imagine the company suddenly devoting almost a third of its workforce to compete with BKNG.

Could either of these companies compete with BKNG in the future? Sure, they have deep pockets and could easily muster the financial resources. However, investors would get ample warning if any true competition was coming as the companies would likely need to hire thousands upon thousands of new employees.

Valuation

BKNG is trading at its cheapest levels in a decade. The stock is priced at 16.5 times forward earnings, 13.6x times EBITDA, and 15 times cash flow. While growth is slowing – revenue growth was 18% in 2018 but is projected to slow to 14% and then 10% - it’s still easily high enough to justify the company’s valuation. Operating margins have been steady over the decade, fluctuating between 35% and 36%. Once the threat of new competition passes, the market should get back to valuing BKNG at a premium.

Disclosure: I am/we are long BKNG, GOOGL, FB. 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.