Thematic evaluation
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Booking Holdings, Inc. (BKNG)

September 22, 2024

Compared to: TripAdvisor, Inc. (TRIP) | Airbnb, Inc. (ABNB) | The Communication Services Select Sector SPDR Fund (XLC)

Our reasoning

Booking Holdings' strong financial performance, market leadership, and growth prospects support a premium valuation. However, current valuation multiples appear to be pricing in overly optimistic expectations, especially considering potential regulatory risks and macroeconomic uncertainties. The company's robust cash flow generation and strategic initiatives provide some justification for the premium, but the current valuation leaves little room for error.

Key takeaways
  • Booking Holdings (BKNG) is a financially strong company with a dominant market position in the online travel industry, consistently outperforming its peers in revenue growth, profitability, and operational efficiency.
  • The company's shift to a merchant model has been a key driver of revenue growth, but also increased operating expenses, pressuring margins.
  • BKNG's strong cash flow generation provides a solid foundation for future growth, but increasing debt levels raise concerns about long-term solvency.
  • The company's "Connected Trip" strategy, leveraging AI and technology, remains a key strategic priority, aiming to deliver a better planning, booking, and travel experience for its customers and suppliers.
  • Regulatory scrutiny, particularly around competition/antitrust issues and digital services taxes, poses an ongoing risk that could increase compliance costs and impact the company's operations.
  • BKNG's valuation is currently above the industry average, reflecting the company's strong financial performance and growth prospects, but its stock price has been more volatile than the benchmark.
  • The company's future outlook is positive, with continued growth expected in the travel industry, but its performance will depend on its ability to navigate the competitive landscape, manage regulatory risks, and capitalize on growth opportunities.
Overvalued
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Evaluation summary

  1. Company Overview:

    • Booking Holdings, Inc. (BKNG) is a leading online travel company that provides reservation services for accommodations, flights, rental cars, and other travel-related products. The company operates under several well-known brands, including Booking.com, Priceline, Agoda, KAYAK, and OpenTable. Booking.com is the company's largest brand, offering accommodation reservation services worldwide. The company generates substantially all of its revenue from enabling consumers to make travel service reservations, as well as from advertising, restaurant reservations, and other services.
    • BKNG's target market is global, encompassing leisure and business travelers seeking accommodations, flights, rental cars, and other travel-related services. The company leverages its extensive network of suppliers, including hotels, airlines, rental car companies, and restaurants, to offer a wide range of travel options to its customers.
    • For comparative analysis, we will be using The Communication Services Select Sector SPDR Fund (XLC) as a benchmark and Airbnb, Inc. (ABNB) and TripAdvisor, Inc. (TRIP) as industry peers.

  2. Financial Performance:

    • BKNG has demonstrated strong revenue growth in recent quarters, driven by the recovery in travel demand and the company's shift to a merchant model. Revenue in the second quarter of 2024 was $5.9 billion, representing a 7% increase year-over-year.
    • The company's profitability has remained strong, with high gross profit margin, operating margin, and net profit margin. The gross profit margin in the second quarter of 2024 was 97.6%, indicating the company's ability to generate significant profit from its core business.
    • BKNG's return on average assets (ROA), return on average total equity (ROE), and return on invested capital (ROIC) have been consistently high, indicating efficient asset utilization and strong profitability.
    • Compared to its peers, BKNG has consistently outperformed both ABNB and TRIP in terms of revenue growth, profitability, and return on assets.

  3. Operational Efficiency:

    • BKNG's balance sheet reflects a strong liquidity position, with ample cash and short-term investments to cover its short-term obligations. The company's working capital management has been efficient, with a current ratio consistently above 1.0, indicating a healthy ability to meet its short-term liabilities.
    • The company's cash flow generation has been robust, with strong free cash flow and a high cash flow to total debt ratio. This indicates a strong financial foundation and the ability to fund future growth initiatives.
    • BKNG's asset quality is generally good, with a significant portion of its assets being cash and short-term investments. However, the company has a substantial amount of intangible assets, which require careful monitoring for impairment risks.
    • The company's capital expenditure has been relatively low, indicating a focus on organic growth and efficient asset utilization.
    • BKNG has a sustainable dividend and share repurchase program, supported by its strong cash flow generation.
    • Compared to its peers, BKNG has demonstrated higher operational efficiency, as evidenced by its higher free cash flow margin and lower capital expenditure.
    • BKNG's debt-to-equity and leverage ratios have been increasing in recent quarters, raising concerns about long-term solvency. However, the company's strong cash flow generation provides some cushion against potential risks.

  4. Growth Opportunities:

    • BKNG has identified several growth opportunities, including market expansion, strategic acquisitions, R&D investments, and geographic expansion.
    • The company is actively expanding its merchant offering at Booking.com, which has been a key driver of revenue growth.
    • BKNG is investing in AI capabilities to enhance its customer experience and improve operational efficiency.
    • The company is also expanding its alternative accommodations business, which is growing faster than the overall business.
    • BKNG is focused on its "Connected Trip" strategy, which aims to provide a seamless travel experience for customers by integrating various travel services.
    • The company's capital allocation strategy is focused on organic growth, strategic acquisitions, and shareholder returns.
    • Management has a track record of successfully executing strategic plans, as evidenced by the company's consistent growth and profitability.

  5. Risks and Threats:

    • BKNG faces several risks, including increased competition, regulatory scrutiny, macroeconomic uncertainty, and data privacy concerns.
    • The online travel industry is highly competitive, with BKNG facing competition from large technology companies, travel service providers, traditional travel agencies, and other online platforms.
    • The company is subject to regulatory scrutiny, particularly around competition/antitrust issues and digital services taxes, which could increase compliance costs and impact the company's operations.
    • Macroeconomic factors like inflation, interest rates, and currency fluctuations can affect consumer travel behavior and the company's financial results.
    • Data privacy concerns are a growing risk for online travel companies, as they collect and process sensitive customer data.

  6. Valuation Analysis:

    • BKNG's valuation metrics, such as P/E ratio and EV/EBITDA, are currently above the industry average, reflecting the company's strong financial performance and growth prospects.
    • Compared to its peers, BKNG is trading at a premium valuation, reflecting its market leadership and strong brand recognition.
    • Potential catalysts for BKNG's valuation include continued growth in travel demand, successful execution of its strategic initiatives, and a favorable macroeconomic environment.

  7. Price Performance:

    • BKNG's stock price has outperformed the benchmark XLC over the long term (2 and 3 years), but has underperformed in the short term (YTD, 1 week, 1 month, 3 months, 1 year). This suggests that BKNG may be more cyclical than XLC, with its performance tied to broader economic conditions.
    • Compared to its peers, BKNG has consistently outperformed both ABNB and TRIP across all historical periods analyzed.
    • BKNG's stock price has been more volatile than XLC, with a higher beta, indicating that it is more sensitive to market movements.

  8. Future Outlook:

    • Management's guidance for the third quarter of 2024 indicates a slight deceleration in room night growth, but the company remains confident in its long-term growth prospects.
    • Analyst estimates for BKNG's future performance are generally positive, with consensus expectations for continued revenue growth and profitability.
    • Potential headwinds for BKNG's future performance include macroeconomic uncertainty, regulatory scrutiny, and increased competition.

  9. Summary:

    • BKNG is a financially strong company with a dominant market position in the online travel industry. The company has demonstrated strong revenue growth, profitability, and operational efficiency.
    • BKNG has several growth opportunities, including market expansion, strategic acquisitions, R&D investments, and geographic expansion.
    • The company faces several risks, including increased competition, regulatory scrutiny, macroeconomic uncertainty, and data privacy concerns.
    • BKNG's valuation is currently above the industry average, reflecting the company's strong financial performance and growth prospects.
    • The company's stock price has outperformed the benchmark XLC over the long term, but has been more volatile.
    • BKNG's future outlook is positive, with continued growth expected in the travel industry. However, the company faces some risks that could impact its future performance.
    • Overall, BKNG is a well-managed company with a strong financial foundation and a solid track record of growth. The company's future performance will depend on its ability to navigate the competitive landscape, manage regulatory risks, and capitalize on growth opportunities.
Peer fundamentals 
Fundamentals
Insights
  • Booking Holdings has experienced strong revenue growth, driven by the recovery in travel demand and the company's shift to a merchant model.
  • The company has a strong profitability profile, with high gross profit margin, operating margin, and net profit margin.
  • Booking Holdings has a strong liquidity position, with ample cash and short-term investments to cover its short-term obligations.
  • The company has a healthy long-term solvency position, with strong free cash flow generation and debt reduction efforts.
  • Booking Holdings is highly efficient in its operations, as evidenced by its high return on average assets and return on average total capital.
  • The company's cash flow generation is expected to continue, providing ample resources for debt repayment, dividend growth, and investment in organic growth opportunities.
  • The company's future outlook is positive, but it faces some risks, such as increasing debt levels and regulatory scrutiny.
Analysis
  • Revenue - Booking Holdings has experienced strong revenue growth, driven by the recovery in travel demand and the company's shift to a merchant model. - The company's revenue growth is expected to continue, driven by its strategic initiatives, such as expanding its merchant offering and developing AI capabilities. - The company's revenue growth is significantly higher than the industry average, indicating a strong market position.
    • Profitability
      • Booking Holdings has a strong profitability profile, with high gross profit margin, operating margin, and net profit margin.
      • The company's profitability is expected to remain strong, reflecting its focus on cost management and operational efficiencies.
      • The company's profitability is significantly higher than the industry average, indicating a competitive advantage.
    • Liquidity
      • Booking Holdings has a strong liquidity position, with ample cash and short-term investments to cover its short-term obligations.
      • The company's strong cash flow generation provides further support for its liquidity position.
    • Solvency
      • Booking Holdings has a healthy long-term solvency position, with strong free cash flow generation and debt reduction efforts.
      • However, the company's increasing debt levels raise concerns about long-term solvency.
    • Operational Efficiency
      • Booking Holdings is highly efficient in its operations, as evidenced by its high return on average assets and return on average total capital.
      • The company's free cash flow margin is significantly higher than the industry average, indicating strong cash flow generation efficiency.
    • Cash Flow Analysis
      • Booking Holdings has a strong cash flow generation profile, with robust free cash flow and a high cash flow to total debt ratio.
      • The company's cash flow generation is expected to continue, providing ample resources for debt repayment, dividend growth, and investment in organic growth opportunities.
      • The company's cash flow generation is significantly higher than the industry average, indicating a strong financial foundation.
    • Risk Factors
      • The company's increasing debt levels raise concerns about long-term solvency.
      • The company faces regulatory scrutiny, particularly around competition/antitrust issues and digital services taxes, which could increase compliance costs and impact the company's operations.
      • Macroeconomic factors like inflation, interest rates, and currency fluctuations remain a concern, as they can affect consumer travel behavior and the company's financial results.
    • Future Outlook
      • Booking Holdings is well-positioned for continued growth, driven by strong travel demand, its strategic initiatives, and its efficient operations.
      • The company's strong cash flow generation and financial flexibility provide a solid foundation for future growth.
      • The company's future outlook is positive, but it faces some risks, such as increasing debt levels and regulatory scrutiny.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-20)
The Communication Services Select Sector SPDR Fund (XLC)
  • Performance Comparison:
    • BKNG has outperformed XLC over the long term (2 and 3 years), but has underperformed in the short term (YTD, 1 week, 1 month, 3 months, 1 year). This suggests that BKNG may be more cyclical than XLC, with its performance tied to broader economic conditions.
  • Risk and Return Analysis:
    • BKNG has provided higher annualized returns than XLC over the past 3 years, but has also been more volatile. This suggests that BKNG may be a higher-risk, higher-reward investment than XLC.
    • BKNG's maximum drawdown has been slightly lower than XLC's, but both have experienced significant drawdowns. This suggests that both are susceptible to market downturns, but BKNG may be slightly less risky.
  • Risk-Adjusted Performance:
    • BKNG's Sharpe Ratio has generally been lower than XLC's, indicating that XLC has offered a better risk-adjusted return. However, BKNG's Sharpe Ratio has been improving in recent quarters, suggesting that its risk-adjusted performance may be improving.
    • BKNG's beta has been consistently higher than XLC's, indicating that BKNG is more sensitive to market movements. This suggests that BKNG is a riskier investment than XLC.
  • Overall Assessment:
    • BKNG has outperformed XLC over the long term, but has been more volatile and has offered a lower risk-adjusted return. This suggests that BKNG may be a higher-risk, higher-reward investment than XLC. However, BKNG's recent performance and risk-adjusted performance have been improving, suggesting that it may be becoming a more attractive investment. Investors should consider their risk tolerance and investment horizon when making investment decisions.
Peers Price History(as of 2024-09-20)
TripAdvisor, Inc. (TRIP)Airbnb, Inc. (ABNB)
  • Performance Comparison: Booking Holdings, Inc. (BKNG) has consistently outperformed both Airbnb, Inc. (ABNB) and TripAdvisor, Inc. (TRIP) across all historical periods analyzed. This outperformance is particularly evident in the longer-term periods, such as the 2-year and 3-year returns, suggesting that BKNG has a stronger growth trajectory and a more resilient business model.
  • Risk and Return Analysis: BKNG has consistently delivered higher annualized returns than ABNB and TRIP across all periods. However, it's important to note that BKNG's returns have come with a lower level of volatility compared to its peers. This is evident in the annualized volatility figures, where BKNG consistently exhibits lower volatility than ABNB and TRIP. Additionally, BKNG has experienced the lowest maximum drawdown among the three companies, indicating a lower risk profile.
  • Risk-Adjusted Performance: BKNG's Sharpe ratio has consistently been higher than ABNB and TRIP, indicating that BKNG offers a better risk-adjusted return. This means that BKNG has been able to generate higher returns for a given level of risk compared to its peers. Furthermore, BKNG's beta, which measures its sensitivity to market movements, has been consistently lower than ABNB and TRIP, suggesting that BKNG is less volatile and less risky than its peers.
  • Overall Assessment: Based on the analysis, BKNG appears to be a strong performer in the online travel industry. It has consistently outperformed its peers in terms of both absolute and risk-adjusted returns. BKNG's lower volatility and lower maximum drawdown suggest a lower risk profile compared to ABNB and TRIP. While ABNB and TRIP have shown some growth potential, their higher volatility and larger drawdowns indicate a higher risk profile. Investors seeking a more stable and less risky investment in the online travel sector may find BKNG to be an attractive option.
Peers Fundamentals(as of 2024-06-30)
TripAdvisor, Inc. (TRIP)Airbnb, Inc. (ABNB)

  1. Market Position and Size:

    • BKNG is the largest company in the peer group, with a market capitalization of 110,819.0 million, significantly larger than ABNB at 71,591.8 million and TRIP at 1,895.6 million.
    • BKNG's market cap is strongly correlated with its revenue, EBITDA, and net income, indicating a dominant market position.
    • BKNG's dominant market position is evident in its significantly larger market capitalization and revenue compared to its peers, suggesting strong brand recognition, a wide customer base, and a robust business model.

  2. Profitability and Efficiency:

    • BKNG exhibits significantly higher profitability compared to its peers and the industry average, as evidenced by its high Gross Profit Margin, EBITDA Margin, and Net Profit Margin.
    • BKNG demonstrates strong efficiency in generating returns, particularly when compared to its peers and the industry average, as evidenced by its high Return on Average Assets, Return on Average Total Capital, and Return On Average Invested Capital.
    • BKNG's profitability and efficiency are impressive considering its size and revenue, suggesting favorable deals with travel providers, efficient operations, and strong brand recognition.

  3. Financial Health and Stability:

    • BKNG's liquidity position is relatively strong, with sufficient current assets to cover its short-term liabilities.
    • BKNG's debt position is relatively stable, with a healthy cash flow coverage of its debt.
    • BKNG's high level of debt, particularly long-term debt, is a significant difference compared to its peers and industry norms, potentially increasing financial risk.

  4. Valuation and Market Perception:

    • BKNG's valuation is generally in line with its peers and industry averages, suggesting that the market perceives it as a fairly valued company.
    • BKNG's EV/Sales and EV/EBITDA ratios are higher than the industry average, indicating that the market may be placing a premium on BKNG's growth prospects and profitability.
    • BKNG's P/E ratio is significantly lower than TRIP's, suggesting that the market may be less optimistic about BKNG's future earnings growth compared to TRIP.

  5. Cash Flow and Capital Management:

    • BKNG generates strong cash flow, exceeding its peers and industry norms, as evidenced by its high Net Operating Cash Flow and Free Cash Flow.
    • BKNG's cash flow generation strength is impressive considering its size and market position, suggesting efficient operations and strong brand recognition.

  6. Growth and Future Prospect:

    • BKNG exhibits strong growth trends, particularly in its revenue, EBITDA, and net income.
    • BKNG's growth rates have been consistently increasing over the 5-year period for sales/revenue, EBITDA, and net income, indicating a positive growth trajectory.
    • BKNG's growth in other areas, such as free cash flow and total assets, may be decelerating, which could potentially impact its future growth prospects.

  7. Potential for Investment:

    • BKNG presents an attractive investment opportunity, considering its strong profitability, efficient operations, and robust cash flow generation.
    • Its dominant market position and growth potential in its core business operations are also positive factors.
    • Investors should be aware of BKNG's high debt levels and decelerating growth in certain areas, which could potentially impact its future performance.

  8. Key Risks and Considerations:

    • BKNG's high debt levels could potentially increase its financial risk.
    • Decelerating growth in certain areas could potentially impact BKNG's future growth prospects.
    • The market may be placing a premium on BKNG's growth prospects and profitability, which may not be fully justified, considering its high debt levels and decelerating growth in certain areas.

  9. Overall Assessment:

    • BKNG exhibits strong overall financial health and performance relative to its peer group and industry averages, taking into account its market position and size.
    • Its high profitability, efficient operations, and robust cash flow generation are key strengths.
    • Its high debt levels and decelerating growth in certain areas are potential weaknesses that investors should monitor.