Booking: Recovery Time

Summary

• From April to June, Booking’s revenues were only $630 million, down 83.4% Y/Y.
• The good news is that the company has a solid balance sheet and it’ll be able to survive and thrive in a post-pandemic world.
• I’m long Booking.

After the publication of my bullish article on Booking (NASDAQ:BKNG) in late June, the company’s shares appreciated by more than 10% and there’s every reason to believe that they’ll increase in value in the next few months. While it will take years for the travel industry to return to its pre-COVID-19 levels, Booking has more than $10 billion in cash, which will help it to survive the pandemics. Already in Q2, the company reported positive GAAP EPS for Q2 thanks to a more than $800 million return from its equity investments. With an established foothold in the OTA field, Booking will be able to thrive and gain more market share in a post-pandemic world, since not every travel-related company will survive the current crisis. For that reason, I continue to hold a long position in Booking and believe that the company is one of the best travel stocks to own on the market right now.

Prepare For a Slow But Steady Recovery

Booking's stock is now more than 10% up since the publication of my latest article and it has every reason to continue to appreciate in the near-term. As a dominant OTA with a diversified portfolio of businesses, Booking is able to generate revenues by taking fees and commissions from each booking and reservation that is made on its platforms. Thanks to the growth of its platforms like Booking.com, Kayak, Priceline, Agoda, and others, Booking was able to achieve more than 20% ROIC in recent years until the pandemic started. While it will be a tough recovery for Booking and it will take time, the company has emerged stronger from the previous black swan events like 9/11, SARS outbreak, ZIKA epidemic, H1N1 pandemic, and others, and this time shouldn’t be any different.

It’s not a surprise that Booking had one of the worst performances in its history in Q2. From April to June, its revenues were only $630 million, down 83.4% Y/Y, while its gross bookings and room nights sold were also down 90.8% Y/Y and 86.7% Y/Y, respectively. The good news is that Booking was able to make a profit on a GAAP basis, as its GAAP EPS was $2.97. By unwinding its stake in Trip.com (TCOM) and other investments, Booking gained $835 million during the quarter.

At the end of June, Booking had $10.40 billion in cash reserves, which is an increase from $6.31 billion at the end of 2019. The company was able to increase its cash position by placing $4.1 billion worth of convertible notes earlier in April and unwinding its stakes in various businesses, which helped it to offset losses in Q1 and Q2. At the same time, Booking doesn’t have an overleveraged balance sheet, as its total debt stands at $12.02 billion and it matures in small installments over time. To preserve cash, Booking also decided to cut 25% of its workforce by the end of the year, which will lead to an annual saving of $250 to $300 million. The company also decided to cut its marketing expenses down 85% Y/Y in Q2, as the demand for travel in the current environment is weak in comparison to last year. Considering all of this, it’s safe to say that Booking has enough liquidity to survive the pandemic.

Since Q3 historically is one of the strongest quarters of the year, Booking believes in the sequential improvement of its earnings and expects to have a positive adjusted EBITDA from July to September. When compared to other travel names, Booking is the only company that has a positive TTM EV/EBITDA and P/E ratio. This suggests that Booking’s business has enough financial flexibility to weather the current crisis and thrive in a post-pandemic world.

Source: Yahoo Finance. The table was created by the author

The upcoming second wave of the pandemic and the slow recovery of travel in the next couple of years will continue to hurt Booking’s bottom line until the virus is contained. However, it’s unlikely that we’ll see another round of full-scale lockdowns around the globe that will once again push the travel industry to its March-April lows. For that reason, the bigger threat for Booking at this stage is Google (GOOG)(GOOGL). As I’ve mentioned in my previous article, Google has been aggressively expanding in the travel niche in recent years, and by launching Google Travel, it’s now able to give its users the ability to book flights and hotels directly from its platform.

However, it’s unlikely that Google Travel will expand further in the foreseeable future. The cost to enter the OTA business is relatively hard. While Booking and Expedia (EXPE) were the first to establish a strong foothold there, many others have failed to do the same. A few years ago, Amazon (AMZN) tried to disrupt the industry, but failed miserably and was forced to close its travel project in 2015. At the same time, Airbnb (AIRB) decided to pivot to the urban apartments market to gain an edge in the industry, as the hotel and vacation reservation business is full of competition. Also, considering that last year alone, Booking and Expedia spent $11 billion on marketing expenses, and most of that money was used for Google ads, it’s unlikely that Google would want to lose all that revenue by fully pursuing its expansion in online travel. For that reason, I believe that while Google remains to be a threat to traditional OTAs, it will not be able to disrupt the online travel business and take a substantial portion of the market share from Booking, especially in the current environment.

The good thing about Booking is that it’s better positioned to survive the pandemic than others. As traditional travel agencies go bankrupt, Booking is already starting to slowly recover. While in April its newly booked room nights were down 85% Y/Y, in July, they were down only 35% Y/Y. Currently, the Street expects Booking to have positive EPS for the rest of the year, while Bank of America expects sequential improvement of its bookings.

Source: Seeking Alpha

Considering all of this, I continue to view Booking as one of the strongest travel recovery names on the market right now. The company has a solid balance sheet and it’ll be able to thrive in a post-pandemic world. Booking’s stock is also likely to move higher on positive news about the vaccine against COVID-19 and the overall bullish sentiment will prevail in the long term. While it will take time for Booking to return to its pre-COVID-19 profitability levels, its stock will appreciate much faster. For that reason, I continue to hold a long position in the company.

Analyst’s Disclosure: I am/we are long BKNG, TRIP. 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.