It was another unsurprisingly difficult quarter, with gross travel bookings, room nights booked and revenues declining by more than 40% year-over-year. That said, this reflects a meaningful improvement from the second quarter, when these metrics declined more than 80% year-over-year.
In the midst of continued short-term pressures on the business, a comment on the long-term is probably helpful: in the middle of a pandemic, when travel has ground to a halt throughout much of the world, room nights booked in the third quarter (127 million) still exceeded the company's room nights booked for the year in 2010 (93 million). In addition, Booking shares currently trade at $1,960 per share, or roughly 10x higher than where they traded at the start of 2010. It's a reminder that what truly matters to the stock price over the long run is the business results over the long run.
The significant decline in business volumes in the quarter led to a 74% decline in non-GAAP net income to $504 million. While the rebound in the third quarter was encouraging, CEO Glenn Fogel continues to reiterate his belief that a recovery will take years, not quarters. The early data from October and November supports this conclusion: as noted on the conference call, management expects room nights booked in the fourth quarter to decline by more than 60% year-over-year. By my math, this implies that room nights booked for the entirety of 2020 will be around 355 million – down by more than 50% from 2019. Simply put, it may be another two or three years before we see Booking Holdings business return to the levels that it reported before the pandemic (in 2019).
That said, I think the continued growth in domestic travel (meaning a U.S. consumer traveling within the U.S. or an Italian customer traveling within Italy) is an encouraging sign. As people feel safe to travel again, they'll start with trips close to home (such as weekend staycations). Over time, as their comfort level rises, the circle around their home will expand; eventually, they'll be willing to fly to a neighboring state or country for a longer trips. In the long run, I believe that this progression, along with the development of a vaccine, will lead people to become comfortable with activities that were common before the pandemic, such as global travel.
Importantly, Booking remains in a position to weather any short-term pressure on its business. A major component of the cost structure is performance marketing, which is a variable cost that rises or falls alongside volumes. In addition, the company has taken efforts to right-size its workforce to account for what's likely to be a meaningful and sustained reduction in business volumes. Finally, the company ended the quarter with nearly $15 billion in cash and investments, compared to $11 billion in long-term debt (the majority of which does not come due until 2025 or later). I believe the company remains well positioned to survive in the short-term, while simultaneously making the investments (organic or inorganic) necessary to thrive long-term.
As shown above, Bookings' room nights booked increased by roughly nine times from 2010 to 2019. That growth reflects a number of structural tailwinds that Booking benefited from over that period (most notably offline to online) – tailwinds that I believe largely remain today.
In my opinion, this is a a great business facing short-term pressures. And I believe the equity is reasonably priced at current levels (at $1,960 per share, the stock trades at roughly 19 times its 2019 earnings). For those reasons, and because I have no concerns about the company's ability to weather any short-term pressures that it may encounter, I continue to own a sizable position in the stock. As countries throughout Europe appear poised for further lockdowns, it will undoubtedly have an impact on Bookings business, and maybe an impact on the stock price. If that happens, and the stock falls 25% to 50% again, it's likely that I would add to my position in the company.
Disclosure: Long Booking Holdings
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