We reinitiated a position in Booking Holdings (BKNG, Financial) during the quarter. The long-term outlook for the global hospitality industry is substantially better compared to when we sold, given the recent emergence of several, well -tolerated, highly efficacious, and widely distributed COVID-19 vaccines. As vaccines are administered to a larger percent of the global population, we expect the negative trends of COVID-19 to tail off, with cross-border travel rapidly improving later in 2021 and into 2022 and beyond. In addition, the market does not appreciate Booking Holdings' formidable and competitive position in the alternative accommodations (AA) industry, particularly within the fast-growing, professionally managed subsegment of AA. Prior to the COVID-19 outbreak, the stock was trading at valuation multiples that reflected overly pessimistic assumptions about the Company's competitive positioning in the online travel agency (OTA) market. The stock has changed little compared to pre-COVID-19, and the implied competitive pressure is still much too pessimistic as the Company will play a key role in aiding properties to repopulate with customers after a dramatic drawdown.
It is a matter of "when," not "if" the critical proportion of the global population necessary to end the COVID-19 pandemic becomes vaccinated. We do not know with certainty when this will happen, but we assume it will be sometime in the next year with the U.S. ahead of most developed markets. However, travelers will make plans well before this. For example, we observe U.S. hospitality search trends on Google are at never-before-seen highs. Airlines continue to post both consecutive weekly and monthly gains in air travel activity. Although the Company's offerings tend to skew more toward European hospitality, the U.S. is a good barometer for what the pace of reopening will look like once European vaccinations catch up with the U.S.
The Company (Booking.com) generates the vast majority of its revenues from traditional hotels. However, we estimate that the Company is the second largest provider in the AA industry, second only to Airbnb. Despite having slightly inferior economic returns compared to traditional hotel OTA, investors view the AA industry as more attractive, particularly due to a larger and less saturated total addressable market. While Airbnb certainly has a brand-level competitive advantage in alternative accommodation compared to Booking.com, the long-term trend of alternative accommodations is toward higher commodification and increased professional management, where branding plays less of a role and conversion becomes more important. Although the trend toward professional management slowed during the pandemic, this is temporary and will resume as travel normalizes. In any case, we think Booking Holdings is capable of generating over $4 billion in AA revenues in the next few years, which is three-quarters the size of Airbnb (which ended the quarter valued at over $100 billion market cap). Again, alternative accommodations are only about 25% of the Company's revenues, with most of the balance of revenues coming from higher-return traditional hotels, which we would argue are more valuable than AA revenues. Given that the Company ended the quarter at a market-cap discount to Airbnb, we think the Company shares could double as the market realizes the tremendous opportunity Booking Holdings has in both traditional hotels and AA.