To The Moon

SUMMARY

• The travel sector, particularly airlines and hotels, is showing resilience despite the macro recession, with record demand and high occupancy rates.

• Booking Holdings, the conglomerate behind Booking.com, Priceline.com, Agoda, and others, has seen its shares increase by around 30% this year, but is still undervalued at a ~16x FY24 P/E.

• Booking's Q1 revenue grew 40% year-on-year to $3.78 billion, setting records in room nights sold and gross bookings dollars.

• Buoyed by high gross margins, Booking's revenue strength should translate into substantial profitability growth during the key summer travel quarters.

  

All around us, we see and hear the evidence of a macro recession, but there is one sector that has remained substantially more resilient than the rest of the market: travel. Heading into the summer season, airlines are enjoying record demand and full flights, and hotels have seen buoyantly high occupancy rates despite taking advantage of the inflationary environment to raise prices.

Benefiting from this post-pandemic "revenge travel" is Booking Holdings $Booking Holdings(BKNG)$ , the online travel agency conglomerate behind the titular Booking.com, Priceline.com, Agoda, OpenTable, and several others. Year to date, shares of Booking have jumped ~30% - yet in spite of this appreciation, I think Booking remains substantially undervalued.

The bull case for Booking.com looks brighter than ever

In light of Booking.com's latest quarterly results (released in early May), as well as multiple real-time news headlines on surging travel demand this summer, I am lifting my outlook on Booking.com to very bullish (up from a bullish view earlier this year).

First let's touch on Booking's valuation. For next year FY24, Wall Street analysts are expecting Booking to generate $22.9 billion in revenue (+11% y/y) and boost EPS to $162.36, up 18% y/y. At Booking's current share prices just above $2,600, the stock trades at just 16.2x forward P/E - a discount to the S&P 500 at an ~18x 2024 multiple. To me, it makes little sense that Booking - which is enjoying substantial top and bottom line growth and secular growth tailwinds - should be valued more pessimistically than the broader market.

For investors who are newer to Booking, here is my full long-term bull case for the company:

• Red-hot travel demand. After a quiet COVID season, travelers are catching up on lost vacations. Picking up on strong end-customer demand, airlines and hotels have also raised rates, which benefits Booking's commission model.

• Work from anywhere. Airbnb (ABNB) has cited this as a benefit to its growth in stays: now that many companies have allowed remote-work from anywhere, many travelers are opting to stay in vacation destinations for extended chunks of time, bringing their work laptops with them. This new "format" for travel has increased wallet share and spending on overall travel.

• Proven to co-exist with Airbnb. Speaking of 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.

• Merchant model growth. Booking has made progress in growing its mix of merchant bookings, which is where Booking directly handles payment from the customer rather than in the agency model, where hotels collect payments and send Booking its commission after the stay. This conversion has helped Booking secure its long-term profitability and cash flow.

• Diversity of brands. With each of Booking's key subsidiaries being individually well known (including OpenTable, which gives Booking exposure to the dining space as well), the company is well-positioned to grow long-term market share.

Stay long here - there's plenty of upside left.

Q1 download

Let's now go through Booking's latest quarterly results in greater detail. The Q1 earnings summary is shown below:

Booking's revenue grew 40% y/y to $3.78 billion, beating Wall Street's expectations of $3.74 billion (+39% y/y) and accelerating four points over Q4's 36% y/y growth rate. Note that FX continues to be a big headwind for Booking.com - on a constant currency basis, Booking's revenue growth would have been seven points stronger at 47% y/y.

The company noted all-tie records in both room nights sold and gross bookings dollars, which grew 38% y/y to 274 million and 44% y/y (52% on an FX-neutral basis) to $39.4 billion, respectively. As has been the case over the past several quarters, the company's merchant-model bookings (which the company is very focused on growing) exhibited much faster 81% y/y growth.

Management noted that the fact that bookings growth outpaced revenue growth (for future stays in which revenue will be recognized in future quarters) will benefit revenue growth going forward. Glenn Fogel, the company's CEO, continues to expect strong travel demand through the summer. Per his prepared remarks on the Q1 earnings call:

Both room night and gross bookings came in ahead of our previous expectations as a result of the continued strength in leisure travel demand and from a lengthening booking window, particularly in Europe and the U.S. The room night and gross bookings outperformance versus our expectations was driven by bookings that will stay in future periods which is when the revenue will be recognized [...]

We currently see very strong growth of bookings received for travel during our peak summer period in quarter 3. Though we note, these bookings represent a modest percentage of what will likely be booked for total summer travel and most of these bookings are cancelable."

From a profitability standpoint, Booking's adjusted EBITDA expanded 89% y/y to $586 million, generating a 15.5% adjusted EBITDA margin - 400bps stronger than the year-ago quarter.

Note that this boost in adjusted EBITDA margins is in spite of the fact that Booking saw strong bookings growth with revenue deferred in future quarters (absorbing the marketing expense in the current quarter). The critical Q2 and Q3 summer travel periods are likely to show more substantial jumps in profitability.

Source: Booking Holdings: Revenge Travel Is Driving New Records (Ratings Upgrade) (NASDAQ:BKNG) | Seeking Alpha