The travel industry has never been stronger, with over 1.3 billion tourists traveling each year, up from 528 million in 2005. In fact, travel and tourism contributes over $8 trillion to the global economy and generates over $1.3 trillion a year in revenue. This is great news for the world’s largest travel agency, Booking Holdings (BKNG, Financial). While growth at the company has slowed slightly, the long-term prospects of the business model remain strong. In fact, considering that we have been in a period of low travel fares, the only way to go is up.
Booking operates a number of well-known online travel platforms, including Priceline.com, Booking.com, Agoda.com, OpenTable.com and Rentalcars.com, and has further expanded with the acquisitions of Kayak and Momondo. With $4 billion in cash flow generated annually, the company can continue to simply wait until another website becomes popular and buy them out, gaining new ideas and customers in the process.
One region the company wants to grow is Asia. Last year it invested $500 million in Chinese ride-hailing company Didi Chuxing, and another $200 million in Grab, which operates across 235 cities in Southeast Asia with businesses ranging from food delivery to ride-hailing to micro-loans. As Asia continues to get crazy rich, this move puts Booking in the driver’s seat for future profits.
The company is set to report earnings in about 30 days and if the company remains on track to earn north of $100 a share in 2019, the current price is a bargain. With tourist arrivals expected to reach almost 2 billion by 2030, Booking’s leadership position and acquisition strategy will likely remain intact for some time. And, with capex spending just 15% of net income, Booking can continue to aggressively buy back shares to get earnigns per share to the target above.
Historically, investors have placed a price multiple of 30x on the stock, which would price shares above $3,000 if the earnings per share meet expectations. To be fair, that’s not too far fetched considering the company’s growth and multiples that the market has placed on other less profitable technology stocks. In either case, it’s not hard to see that, right now, Booking Holdings is undervalued.
Disclosure: I am not long or short Booking.
