Booking Holdings Inc. (BKNG): A Tollbooth on Global Travel Growth

Investment Write-ups

Business Description

Booking Holdings Inc. (BKNG) is the largest online travel booking platform in the world. The company facilitates transactions between travelers and everything they might need such as: hotels, vacation rentals, airlines, rental car services, restaurants, etc. They own brands such as Booking, Priceline, Agoda, Kayak, Rentalcars, Open Table; as well as significant investments in several of the most popular Chinese leisure companies, including Ctrip, Didi Chuxing, and Meituan Dianping.

In most cases, BKNG acts as a platform and receives a commission for connecting travelers with service providers, creating a toll booth-like business model that generates significant cash flow. Management has historically demonstrated the ability to reinvest this cash flow with incredible foresight into growing markets (Asia, vacation rentals, payments, attractions, etc). In other cases, BKNG acts as a broker, buying hotel rooms in bulk and selling them individually at a profit. BKNG also generates advertising revenue on platforms such as Kayak.

Travelers win in this model through better pricing, greater selection, reliable reviews, and convenience. Service providers win in this model through increased demand. The beauty of this model is that both sides benefit from the network effects; more users means more supply, which means better user experience, which means more users, which then means more supply.

Along with that network effect, the often-overlooked key to BKNG’s excess returns stems from the fact that most of their revenue is generated in Europe, rather than the US. In Europe, the hotel marketplace is dominated by smaller independent boutique hotels, rather than large chains such as Hilton or Marriott. These smaller hotels are much more dependent on BKNG’s services, whether that be demand generation, marketing, customer support, website translation, etc, reducing their bargaining power, and giving BKNG a wide economic moat.

It is this geographic differentiation that enables BKNG to consistently generate much higher returns than their largest competitor, Expedia, who have most of their exposure in the US. Here, the large chains have more bargaining power, and continually drive down commission rates. Consider the following chart comparing margins and growth rates for different companies in the industry:

As you can see, BKNG’s margins are not only higher than Expedia’s and the rest of their online travel agency peers but actually tend to be closer to the high-flying internet monopolies, like Google and Facebook.

Investment Thesis

We recently added to our position in BKNG as the stock fell on concerns over the state of the European economy and lower than consensus earnings guidance. However, the long-term prospects here far outweigh these short-term concerns:

The financial characteristics of the business are fantastic. The balance sheet is pristine with over $4B in net cash and investments, EBITDA margins are just under 40%, and the company is producing more cash than it knows what to do with (buying back 10% of the share base and looking for M&A opportunities).
The economic moat is considerable. In some of these network-based moats, if suppliers are large and powerful enough, they can put pressure on a network platform before it gains too much power. Think Disney pulling its content from Netflix or the record labels forcing pricing concessions on Spotify. The main question we must ask ourselves is will the network reach critical mass before that happens? We argue that BKNG has already reached that critical mass where service providers can’t ignore it. This is evidenced by their stable pricing, margins and market share. Travelers naturally gravitate to the platforms offering the most choices and best deals, and suppliers want to go where the travelers are.
If that wasn’t enough, BKNG also participates in one of the best secular growth stories around – increased global online travel spending. As global GDP continues to grow, poor countries continue to get richer, and Millennials continue to prioritize experiences over material goods, it hard to see how this trend changes.

Risks

All that being said, it is worth highlighting three competitive threats here: Airbnb, Google, and direct hotel bookings.

Airbnb is a relatively new entrant to the space but has emerged as a powerful disruptive force in the travel industry. By facilitating the listing of apartments and homes as travel accommodations, Airbnb is unlocking new supply that will cannibalize existing hotel bookings but will also open a new growth category. Since travelers are increasingly considering and booking both traditional hotels and alternative accommodations, it makes sense that BKNG and the other online travel agencies would just adjust their offering to follow the consumer’s preferences.

And that is exactly what we are seeing, BKNG now has more alternative accommodations on their platform that Airbnb does. The reason BKNG has been able to catch up so fast is that their inventory is 100% online bookable (no emailing back and forth with home owners), BKNG’s commissions are paid by the property owner, rather than the booking fees charged on travelers by Airbnb which tend to annoy the traveler, and BKNG has better established knowhow on how to acquire and convert demand.

Google already offers consumers the ability to research flights and hotels which directly competes with Kayak (BKNG’s travel aggregator), and BKNG depends on Google to drive traffic to their website, so any break in that relationship could be disastrous. However, BKNG and the other online travel agencies are also Google’s largest customers (due to ad spending), and as such Google has made no suggestion that they want to directly compete with the hand that feeds them. Even if they did, it is not an easy task to integrate thousands of independent hotel systems into a single platform, as well as offer customer support services for each, which BKNG has already done through a long and challenging process.

Large hotel groups have been trying to drive direct booking for a while now to avoid commissions paid to companies like BKNG, often through their own attractive reward programs and discounts. But the online travel agencies are now offering reward programs of their own, as well as greater selection, and the large hotel brands just don’t have the same knowhow when it comes to bidding for competitive search traffic and converting that traffic into bookings. Furthermore, BKNG avoids a lot of this issue through their attractive independent hotel base in Europe.

Valuation

Even if we believe these are all serious threats to story, which we don’t, today’s valuation more than compensates for the risk. We believe that BKNG has an above-average growth outlook, an above-average return profile, an above-average moat, an above-average balance sheet, and an above average management team, and so it should be rewarded with an above-average valuation, yet today it trades at a lower valuation than the average S&P company.

As such, we are happy to continue investing in this asset-light, well defended, compounding, cash flow machine. We should comfortably expect double digit earnings growth per share for the foreseeable future and our DCF puts BKNG’s fair value at north of $2,500.

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Booking Holdings Inc. (BKNG): A Tollbooth on Global Travel Growth