With travel activity picking back up again, travel agency stocks have seen a strong recovery in business over the past few quarters. One of the key players in this space is Booking Holdings (BKNG, Financial), one of the world leaders in providing online travel bookings and related services. It is a parent company of websites including Booking, Priceline, Kayak, Agoda, RentalCars and OpenTable and has a strong presence in Europe, where the company is the primary booking platform for many small properties. Let us take a closer look at the company to see why I think its recent innovations present long-term upside potential.
Business model
Booking Holdings enables people to plan their travels hassle-free by offering holistic solutions for all their travel and related booking needs. Vendors offering online travel-related services follow a similar model. They list all offerings by actual lodging providers, advertise for customers and take a commission on the sale when customers book. All sites operated by Booking Holdings offer similar products and services. They follow the same business model, and so do Booking Holdings' competitors such as Expedia (EXPE, Financial) or even Airbnb (ABNB, Financial).
For hotel bookings, the hotel pays a fee on its revenues to Booking Holdings and other online travel agencies for the bookings that they are responsible for delivering. This arrangement makes paying fees more acceptable to hotel owners as it is directly related to new revenue generation. Airbnb also has a similar model where it charges fees for bookings through its platform, but it offers more individual properties instead of hotels. Its differentiated offering is one of the biggest reasons why it is one of the most highly valued players in this domain, above the likes of Booking Holdings and Expedia.
Competitive advantage in Europe
In the majority of its business, Booking Holdings is not in a position to leverage the lock-in effect of a two-sided marketplace. The reason for this is that most of their customers come through Google (GOOGL, Financial) Ads purchases. and many hotels listed with Booking Holdings are also listed on other platforms.
However, the European market is an exception to this. In Europe, small hotels are more common in comparison to the hotel chains that dominate the U.S. As a result, Booking Holdings gets a key competitive advantage because these smaller hotels are more likely to sign exclusivity agreements with it. Booking.com is actually known to have the best selection of hotels in Europe, which is why travelers searching for hotels are more likely to start their search on its platform.
This results in a reduced cost of customer acquisition. As a result, the company has better margins even if they do not charge hotels extra since they end up paying much lower amounts to Google for acquiring customers.
However, it remains to be seen how long this advantage is sustainable. With increased digitization, even smaller hotels are likely to list on multiple platforms or even Airbnb for that matter and try to compete with individually listed properties based on personalized services. This might impact the company’s competitive advantage. Booking Holdings is trying its best with increased ad spending in Europe to ensure its dominance in the market.
Strong Europe and US Recovery
A strong boost in travel demand from the U.S. and Europe has led to a recovery in Booking's quarterly revenue. In fact, the company's quarterly revenue more than tripled from 2020 lows and beat the average Wall Street estimates, reaching $2.16 billion for the most recent quarter with a gross margin of 74.58% and an operating margin of 3.80%.
The recovery was also aided by the ease in travel restrictions and better vaccine rollouts. New variants continue to be a threat and the company’s Asia recovery has been slow with many travelers choosing alternative accommodations such as homestays compared to hotels. The company has significantly increased the listings of alternative accommodations on its Booking.com platform.
Another factor worth highlighting is that Booking Holdings’ operating expenses have nearly doubled, resulting in a larger-than-expected loss per share of $2.55 in the most recent quarter. However, with the holiday season coming up and the general population becomes less and less wary of the pandemic, I expect the company’s result for the coming quarter to be much better than before.
Fintech opportunity
Booking Holdings is also growing into the fintech vertical. In the initial stages, the company plans to use payment flows from its core business to compete on the digital front. The management claims that they witnessed close to $100 billion of transaction value on their platform and believe that setting up a separate fintech arm would help them to capitalize on these flows and would be beneficial for them in the long run.
It would be following the footsteps of other large marketplace businesses such as Alibaba (BABA, Financial) in order to make the most of the large transaction value on its platform. If Booking Holdings can successfully gain scale this business, it would be a new source of revenues that the market has probably not factored in while evaluating the firm. The company has an initial plan to provide more cut-throat currency exchange costs to customers in comparison to credit card companies. This way, the company will be billing American clients traveling to Europe in U.S. dollars and paying the hotels in Euros while earning a small margin on the exchange.
Final thoughts
As we can see in the above chart, Booking Holdings’ stock has had a strong recovery after the initial onset of the Covid-19 pandemic. It trades at a premium over rival Expedia, but it trades for a discount as compared to Airbnb. The company’s current enterprise-value-to-revenue multiple of 14.16 appears to be slightly on the higher side, which is why the stock has been moving sideways for the past few weeks.
The speculations associated with accretive acquisitions and the success of the fintech unit could be a long-term upside, but for now, Booking Holdings is valued at a premium and does not seem like a particularly attractive pick from a valuation perspective. I believe that a wait-and-watch approach would be ideal for the stock.
