Booking Holdings: Benefiting From Strong Travel Demand

Jul. 31, 2022 10:27 AM ETBooking Holdings Inc. (BKNG)3 Comments
Felix Fung profile picture
Felix Fung
373 Followers

Summary

  • Booking Holdings is now down almost 30% from its all-time high.
  • The travel company is posting very strong results with triple digit revenue growth and the highest ever quarterly bookings.
  • Recent earnings from other travel companies indicate robust travel demand despite a sluggish economy.
  • Current valuation is also historically undervalued.
  • I rate the company as a buy.

Young Family Having Fun Traveling Together

miniseries/E+ via Getty Images

Investment Thesis

Booking Holdings (NASDAQ:BKNG) has been one of the best compounders, with the stock price rising from $50 in 2008 to over $2000 in 2020, up 4,000%. the company is the world's leading provider of online travel and related services. It operates primarily through six brands which include Booking.com, Priceline, Agoda, Rentalcars.com, KAYAK, and OpenTable. It has a presence in over 200 countries with over 100 million active users globally. However, the unprecedented pandemic in 2020 crushed the company as the whole travel industry shut down due to worldwide lockdowns. With the company down 30% from its all-time high, I believe this offers a good buying opportunity for investors while the company continues to recover.

As the pandemic wanes and travel restrictions ease, Booking Holdings is likely to benefit significantly from these tailwinds. It is posting strong financial results and has a very solid balance sheet. Other travel companies' recent earnings also indicate robust travel demand and spending, despite a weakening economy. The company is also now trading at a historically low valuation. Therefore I believe Booking Holdings is a buy at the current price.

BKNG stock Chart
Data by YCharts

Strong Results

Booking Holdings reported very strong earnings back in May, signaling a better than expected recovery. The company reported revenue of $2.7 billion, up 136% YoY (year over year) from $1.1 billion. Agency revenue was $1.5 billion, up 102%, merchant revenue was $1.1 billion, up 182%, while advertising and other revenue were $195 million, up 282%. Bookings also saw robust growth, which was up 129% YoY to $27.3 billion, the highest quarterly amount in the company's history. The increase is largely driven by improvement in room night trends (up 100% YoY), increased accommodation ADRs and significant growth in global flight products.

Booking Holdings also returned to profitability this quarter. Non-GAAP net income for the quarter was $161 million, compared to a non-GAAP net loss of $(215) million in the prior-year quarter. Non-GAAP net income per share was $3.9, compared to a loss of $(5.3) per share a year ago. Adjusted EBITDA also went from negative $(195) million to $310 million this quarter, representing a margin of 11.5%. Operating cash flow significantly improved from negative $(207) million to $1.7 billion. The operating cash flow margin was 63%. Unlike a lot of other travel companies which have a vulnerable balance sheet due to heavy debt load, Booking Holdings' balance sheet is very strong. It ended the quarter with $10.1 billion in debt and $10.6 billion in cash, more than enough to cover all its debt.

Glenn Fogel, CEO, on Q1 results

"Despite an uncertain macroeconomic environment, we have seen continued strengthening of global travel trends so far in the second quarter of 2022, and we are preparing for a busy summer travel season ahead. I'm encouraged by how well our teams are executing to capture travel demand in this recovery environment and our progress in expanding our payments platform at Booking.com while we build towards our Connected Trip vision.

Other Companies' Earnings

Recent earnings reports from travel companies are indicating strong travel demand and spending, as consumers are finally able to travel overseas after almost 2 years of worldwide border shutdown. Companies like Hilton (HLT), Visa (V), and American Airlines (AAL) all highlighted stronger-than-expected traveling volume during their earnings. Hilton reported revenue of $2.2 billion, up 68.4% year-over-year, American Airlines reported revenue of $13.4 billion, up 80.1% year-over-year, while Visa reported cross-border volume growth of 40%. Commentaries from management during earning calls are also very positive and encouraging. I believe the upbeat guidance from other companies should bode well for Booking Holdings as the company is going to report earnings on 8/3.

Robert Isom, American Airlines' CEO, on travel demand:

Leisure demand surpassed 2019 levels in the second quarter, and customers continue to show us their increasing appetite for travel. Enrollments in our loyalty program continue at record levels, and spend on our co-brand cards is growing at a greater rate than ever before.

Vasant Prabhu, VISA's CFO, on cross-border travel volume

The robust cross-border travel recovery continued. Index to 2019, cross-border travel volume, excluding transactions within Europe, jumped from 94 in March to 112 in June. This was helped by much of Asia opening up at the beginning of the quarter.

Visa transaction count

Visa

Compelling Valuation

After a 30% drop from its all-time high, Booking Holdings is now trading at a very compelling valuation. The current PE ratio looks expensive at 156x but this is because it discounted the growth for the remaining quarters this year. If we factor in the EPS (earnings per share) growth, the company is actually trading at an FWD PE ratio of 19.6x, which is historically undervalued. From the chart below, you can see that since the great financial crisis, the company has been trading around an average PE ratio of 25x, and has almost never traded below 20x PE.

With pent-up travel demand, the company is forecasted to continue its strong growth which will further compress its valuation. According to Seeking Alpha's analyst estimate, the FWD 23' PE ratio is forecasted to be 15.1x, a steep discount compared to its historical average. The company's stock price is now trading at 2017 levels yet this year's revenue is forecasted to be 41.7% higher than 2017's. I believe the current valuation is attractive and a reverse to the average PE ratio will present a 25%+ near term upside.

BKNG stock PE ratio
Data by YCharts

Monkeypox Outbreak

Monkeypox has been one of the latest hot topics. The viral outbreak first started in the UK earlier this year and is spreading quickly around the globe. There are now over 22,000 cases worldwide with almost 5,000 cases in the US alone. Health officials around the world are highly alerted to this and vaccines are now on the way. I believe investors should follow this closely as it may post substantial headwinds on Booking Holdings.

Last Thursday, San Francisco and New York declared an emergency over the disease citing the rapid increase in cases in the last month. The declaration will allow local authorities to mobilize more resources and staff to confront the outbreak and accelerate emergency planning. Currently, no emergency closures or restrictions have been planned, as Monkeypox is believed to be spread through very close contact. The scale and impact of this outbreak are still very small compared to COVID but if it continues to spread quickly, lockdowns or border closures may be possible. This will once again shut down the travel industry and significantly impact the company in the near term. I think the chances of this happening are unlikely but it is definitely a risk to beware of.

Conclusion

In conclusion, I believe the current drop is unjustified and long-term investors should take advantage of this opportunity. Despite the share price being almost 30%, Booking Holdings continues to see a robust recovery. It posted very strong earnings with the highest bookings amount in the company's history. Revenue was up triple digits with strong growth across all revenue streams and the company returned to profitability. Results from other travel companies also indicate the demand for traveling continues to be very strong. The company is also now trading at a historically low valuation while it continues to benefit from re-opening tailwinds. The recent monkeypox outbreak may post unprecedented headwinds on the company but the risk of it happening is still very low at this moment. Therefore I rate Booking Holdings as a buy.

This article was written by

Felix Fung profile picture
373 Followers
I am a student studying sociology and economics at the University of New South Wales. I just started writing and I appreciate any type of feedbacks and comments.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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