Booking: Despite New Dividend, Upside Remains Limited

seekingalpha03-28

Booking's stock performance has been flat this year, and its future potential from the 2024 summer travel season is already priced in.The stock is trading at a robust 21x FY24 P/E ratio.While Booking ...

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Booking (NASDAQ:BKNG) is one stock that merits a closer watch. The online travel giant has seen ~flattish stock performance this year as bookings trends decelerate, after capping off a very strong 2023. All eyes are turning ahead to the potential from the 2024 summer travel season: so far, travel has been one of the categories least impacted by macro woes, but arguably a lot of this strength is already priced into Booking’s stock. Data by YChartsI last wrote an article on Booking in December, when the stock was trading closer to a ~$3,100 price. I had cut my rating on Booking from buy to neutral at the time. Since then, the company has released Q4 results that showed a largely expected deceleration in room nights and revenue. We note as well that Booking has initiated its first dividend ever at $8.75/quarter, which roughly translates to slightly less than a 1% annual yield. While the dividend news is certainly not a negative and signals confidence in Booking’s ability to continue generating healthy profits, it’s not an enticing enough reward to make up for what I believe to be a fair valuation against already-rich expectations. All in all, I recommend staying on the sidelines here and continue to be neutral on this name. At current share prices above $3,600, Booking trades at a ~21x FY24 P/E, based on current consensus targets for ~$174 in pro forma EPS this year. That doesn’t make Booking excessively expensive, especially with the newly added side-benefit of a dividend. But in my view, with Booking’s top line growth slowing to the low teens/high single digits, it also doesn’t leave much room for multiple expansion. So at current share prices, I see a relatively balanced bull/bear case for this company. On the bright side:   Airfare opportunity- Booking's airline ticket sales are growing at a nearly 60% y/y pace, far eclipsing the broader company. It's still a very slim portion of overall revenue, but the company notes that airfare has been a great way to get new Booking customers in the door who may eventually also package in hotel bookings with their trips.  Proven to co-exist with Airbnb- Now that both OTAs and Airbnb have been side by side in the market for years, we can see that there is room for both. Airbnb certainly has its uses and functions (larger homes for group trips, more localized stays in smaller towns); but so does staying in hotels (convenience of a check-in counter when needed, amenities like gyms and spas, proximity to city centers). The notion that Airbnb will kill hotels and OTAs has become antiquated.  But at the same time, risks are on the horizon:   Lightning rod for criticism and price competition- Hotels have long complained about the heavy commissions paid to OTAs. In a time of extreme sensitivity against commissions previously thought untouchable (just look at what's happening to real estate commissions with the recent ruling against the NAR), the business model for OTAs may get upended soon. Note as well that Booking is mired in a number of regulatory tangles, including with the government of Spain which has fined the company $530 million.  Will the travel boom recede? The past two summers have seen very strong travel demand as people caught up on their holidays post-COVID... but does this mean that demand is pulled forward from future seasons?  All considered, I view Booking as appropriately priced for its set of risks and opportunities. Keep this stock on your watch list, but don't jump in and buy while markets are at all-time highs. Q4 download Let's now go through Booking's latest quarterly results in greater detail. The Q4 earnings summary is shown below: Booking Q4 results (Booking Q4 shareholder letter)Booking’s revenue grew 18% y/y to $4.78 billion, ahead of Wall Street’s expectations of $4.71 billion (+16% y/y) by a slight margin. Importantly, note as well that revenue growth decelerated three points versus 21% y/y growth in Q3. The same trend played out across gross bookings. In nominal terms, gross bookings for the quarter were $31.7 billion, up 15% y/y and decelerating six points q/q (versus only a one point deceleration in revenue in constant currency terms). We note that constant-currency bookings growth in Q3 had outpaced revenue growth. Since many travelers plan and book their trips in advance, gross bookings is a solid forward-looking indicator of where future-quarter revenue trends will land. As shown in the chart below, room nights booked in the quarter were 231 million, decelerating as well to 9% y/y growth (from 15% y/y in the prior quarter). The company continues to cite lingering overhang from the conflict in Israel; adjusted for this, the company notes that room nights would have grown 11% y/y. The company still expects this growth rate to decelerate further, as its Q1 outlook calls for a 4-6% y/y growth in room nights booked (with a 1 point headwind from Middle East tensions). Booking key trended metrics (Booking Q4 shareholder letter)At a macro level, the company still believes that travel spend is exceeding GDP growth, and that indications for the summer travel season look healthy. Per CEO Glenn Fogel’s remarks on the Q4 earnings call: At the start of 2024, we continue to see resiliency in global leisure travel demand. As we look to the year ahead, we see strong growth on the books for travel that’s scheduled to take place in 2024, which gives early indications of potentially another record summer travel season. As we’ve noted previously, a high percentage of these bookings are capable and what is on the books today for the summer period represents a small percentage of the total bookings that we expect to ultimately receive. David will provide further details on fourth quarter results and on our thoughts about the first quarter and full year 2024.” From a profitability standpoint, Booking notched $1.46 billion in adjusted EBITDA for the quarter, up 18% y/y - in line with revenue. Adjusted EBITDA margins remained roughly flat y/y at 30.6%. The company’s main lever to increased margins over time is improving its cross-sell ratio as it ramps up non-hotel products like flights and rental car bookings, to capture more of its consumers’ wallet share for its outlay in marketing spend. Key takeaways  In my view, there are very few opportunities for Booking.com to break up and out of its current trading range. Travel demand remains healthy for now, but this is already priced into Booking's ~21x P/E valuation. Steer clear here and invest elsewhere.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422927943"}