blackCAT
Investment Thesis
Booking Holdings (NASDAQ:BKNG) will continue to benefit from continued growth in tourism, owing to a low base from previous years. According to the Economist Intelligence Unit travel & tourism may grow by as much as 30% in 2023, as Chinese tourists, start to fly once again. This is compared to a 60% growth in 2022. In previous years zero-COVID policies kept a lid on tourism from China, which has been a major source of growth in recent. As that changes this year, Booking Holdings will benefit from the increased tourism. Additionally, travel numbers still remain below 2019, leaving room for growth.
Results continue to remain robust
Booking.com which calculates its revenue in terms of ‘room nights’ witnessed a 52% improvement in 2022, compared to 2021. This correlated well with the growth in tourism, which grew by 60%. Should growth continue to correlate with Booking Holdings’ own growth, expect room nights to increase by around 25%, or to around 1.1-1.2 billion room nights in 2023. During the latest quarter, Booking Holdings, witnessed 4 billion dollars in revenue, up from $2.9 billion in 2021, which shows that despite global headwinds, the sector remains strong. This momentum should continue into the next couple of quarters at least, as travel does not seem to be relenting, especially as significant travel is set to come in from China.
One of the reasons that Booking Holdings continues to outperform, is its network advantage. The company has been working tirelessly to improve its network over the years, and at times offers prices and deals especially when consumers are trying to book hotels.
Booking Holdings’ main advantage stems from its network advantage, which has allowed it to retain its agency model, vs. moving to a merchant model, where the online travel-agency would be responsible for the payment fees. This has meant that Booking.com does not have any ‘inventory’, so to speak, which allows it to maximize its cash-flow, and not incur losses on pre-bookings, which is the case with a ‘merchant model’.
This model has especially been useful in recent years, where the company has been able to connect hotels, and customers directly. The combination of the agency model, combined with its network advantage has allowed the company to seek concessions from hotels, when it comes to pricing, which then reflects in the company’s market position, as customers usually seek out the cheapest source to book their hotel’s from.
Booking.com usually offers cheaper hotels, especially for mainstream hotels, which is the core of its business. While the likes of Agoda.com have been able to compete in the budget hotel category, Booking.com’s focus has largely been on more premium offerings, especially within the hotels category, which means it can target higher-value travelers, and that reflects in its cash flow.
Booking.com retains significant market position currently as well, and in terms of online travel and tourism booking market share, Booking.com is currently ranked number 3, in terms of overall travel market share, which includes, airline booking. Clearly, the site is a favorite among consumers and is likely to continue to do well in the future as it looks to take on travel demand for 2023.
Travel numbers still remain muted compared to 2019, leaving plenty of room for growth
Adding to the China theme, there’s also there also remains plenty of room to grow, as global travelers are still below pre-pandemic levels but according to UNWTO, those numbers could reach anywhere from 80-95% of pre-pandemic levels in 2023. Global tourism still remains around 1 billion, significantly below the 1.5 billion in 2019. As numbers continue to head towards historical levels, Booking Holdings’ own fortunes should correlate with the rise as well, owing to the company’s market position.
Booking Holdings’ fourth quarter though gives an insight into global travel trends with airline tickets booked, up 61% compared to the previous year. Global travel should continue to pick up in 2023, despite a slowdown in the economy and consumer spending, global travel still remains relatively strong, and Bookings Regardless, now that COVID is well past us 2023 will be a year when consumers are likely to think twice before lavishly spending on travel, and this could affect Booking.com revenue. Therefore, risks remain to travel, as recession, and general macro headwinds, stemming from inflation and slowdown in growth could affect travel numbers.
Despite talks of consumer spending coming under pressure, at least in 2022, the data showed that consumers were willing to spend, and that despite fewer travelers than 2019, travel spending was 5% above 2019 levels, which is being reflected in the cash flow.
Cash flow is a significant positive
Despite the volume of travel still below 2019, Booking Holdings has been witnessing a surge in the value of its booking, which led to Booking Holdings’ free cash flow coming in at $6.2 billion 38% above 2019 levels. The higher level of cash flow, stemming from higher-value bookings, will play a key role in the company’s fortunes moving forward.
Since there are no extra foreseeable increases to cash expenses, expect cash to grow in tandem with overall revenue growth. This means anywhere from 20-25% growth in correlation with the total growth in passengers in 2023. Therefore, cash flow could balloon to $8 billion in FY23’. Meanwhile, analysts expect an 18% median growth in revenue. My own projections are slightly higher, as more Asian tourists, especially Chinese tourists take to traveling offsetting some of the slowdown elsewhere such as the US, where savings continue to be pushed further down.
Despite the positives, 2023 could continue to see issues with dwindling savings, and a lot more travelers whether business or pleasure being relatively reticent compared to previous years when COVID savings and the fact that they had missed out on traveling due to restrictions. Should the economic situation worsen, or consumers significantly reduce their spending, growth could fall back, potentially to around 10-15%, which is what I would estimate the rate would be, based on lower consumer spending, inflation, and the effect of higher interest rates on economic growth.
Can BKNG stock continue to rise?
The company currently trades at around a P/E ratio of around 35x, and with a growth of 20-25%, in the bottom line in 2023, that would put the forward P/E around, 26-28x, which makes the P/E quite reasonable. Furthermore, the return on equity of 83%, makes the company only further attractive.
Having said that, despite the broader bear market, investors have continued to invest in BKNG stock, and as long as the company continues to produce results that are in line with market expectation, the stock should continue to rise.
Having said that, with recessionary fears now looming as global GDP continues to see a slowdown, this could affect Booking Holdings’ revenue. Should revenue come in the low double digits say 10-15%, the current valuation might be a bit rich for investors, which could lead to the stock correcting, potentially by 15%, which would put the forward P/E at 22x, a valuation level, that would be more-or-less acceptable to investors.
BKNG stock could continue to gain through the coming year, although a lack of dividends is not acceptable in my opinion, considering the level of cash flow the company is generating. The company currently has over $12 billion in cash and cash equivalents, which potentially sets the future for a one-off dividend, or eventually management could indulge in significant buybacks, as it looks to return cash to shareholders.
Booking.com is largely looking positive moving into the year, the stock has continued to rally for the past 52 weeks, at a time when the broader market has been retreating. Clearly, investors have a positive view of the company. Going into 2023, I expect the momentum to continue and whatever negatives there are will likely be offset by positives. Investors can look at this as a mix of value and growth, a rare combination in the investing world.
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