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Nicholas Coppola, CFA
January 8, 2020
We recently added Booking Holdings (BKNG) to portfolios in our individual stock strategy. As a matter of quick background, Booking Holdings is a leader in online travel and operates a number of businesses including Booking.com, KAYAK, priceline, agoda, Rentalcars.com, and OpenTable. While the company does not disclose the size of each business, Booking.com is their most significant brand, and a large percentage of Booking.com is driven by international markets (e.g., Europe). This letter lays out our long-term expectations for the company, our thoughts regarding their go-forward strategy, as well as possible risks to our investment thesis.
First, we think that Booking Holdings has a long runway for growth. This rationale starts with the simple idea that the global travel industry should grow faster than the global economy, as consumers with greater disposable income spend more on travel. Taking this a couple steps further, the online portion of the travel industry is expected to grow faster than the offline portion of the travel industry, and more specific to Booking Holdings, as the company leverages their competitive advantages, market share gains should translate to additional growth relative to peers. So what specifically are these competitive advantages? In our view, it comes down to benefits from scale and strategic vision (i.e., the Connected Trip). In regards to scale, Booking Holdings is currently the largest player in the industry, and compared to Expedia, has more than two times the room nights booked (although there are some significant differences in share by region). And importantly, from the consumer’s perspective, we think the main value in this business resides in the convenience of visiting one website, like Booking.com, with the ability to search a wide assortment of hotels with low and transparent pricing. All else equal, we think the Booking.com experience is far better than visiting a sub-scale platform with a smaller assortment of hotels, or even worse, visiting hotel websites one at a time.
In terms of Booking’s go-forward strategy, we are optimistic about management’s vision for the ‘Connected Trip’, where the company seeks to be a one stop shop that offers hotels, flights, rental cars, restaurant reservations, touring attractions, and more. At a recent investor conference, Glenn Fogel (CEO) compared their offerings to the historical use of travel agents. Prior to the rise of digital travel sites, many travelers relied more heavily on recommendations from travel agents, who added value based on their knowledge of a client’s budget and what they’d enjoyed in the past. Additionally, if issues were to arise during their trip (which inevitably they would), the travel agent was available to troubleshoot. Enabled by technology, management believes they can better replicate this experience and do it more efficiently. Note that Booking Holdings has a dedicated AI team working on personalization initiatives, which is expected to improve the user experience as well as drive higher sales conversions. As a simple example, with the assistance of big data, someone who regularly stays at one type of property can be marketed different restaurants and attractions than someone who regularly stays at another type of property. Or someone who’s enjoyed a specific type of restaurant in one city can be marketed a similar type of restaurant in another city that’s close to their hotel. Additionally, if a customer has their entire trip booked through a single platform, that platform (or customer service rep) is better equipped to make changes (e.g., if your flight gets delayed, you can be prompted to push back your restaurant reservation). Importantly, to the extent that this initiative is successful, it also drives customers to book travel arrangements directly through Booking.com rather than starting their search process through a Google meta-search, which is a higher-cost customer acquisition channel.
In our view, the threat from Google is one of the bigger risks on investors’ minds currently. And while this may be partially mitigated by the success of the Connected Trip over the longer-term, at this point, it’s far from eliminated. Note that Google owns a significant portion of the customer acquisition funnel (i.e, a fair number of people start their search with Google), which is an important advantage relative to other competitors in the online travel space. Of course, we have a great deal of admiration and respect for the team at Google (in fact, we also own GOOG in individual stock portfolios), and we wouldn’t underestimate their ability to disrupt the travel industry. That said, we also think it’s important to understand the key differences between Google’s meta-search offering and Booking.com. Google’s meta-search is a ‘search of other searches’, which means Google doesn’t control hotel relationships and directs customers to other online travel agencies, including Booking.com. In our view, Google would find it difficult to secure a similar mix of hotel relationships, consistent with our view that benefits from scale have made early winners harder to displace. There’s also the customer service infrastructure required to compete more directly, which we think Google would prefer not to build out. Our rationale is furthered by Booking’s heavier exposure in Europe, which has a more fragmented hotel industry vs. the United States, resulting in a greater number of smaller hotels to onboard. As an aside, we like Booking’s greater exposure to Europe relative to Expedia, since smaller hotels make the company’s offerings more valuable, as many of these smaller players don’t have the scale to invest in digital marketing initiatives as they seek to sop up excess room night supply.
Another key risk on investors’ minds is the rise of Airbnb, which we think Booking.com is already addressing successfully. Note that Booking.com currently has more than 6.2 million alternative accommodation listings, which is not far from Airbnb at more than 7.0 million listings. Alternative accommodations at Booking.com include vacation homes, cabins, guest houses, apartments, bed and breakfasts, as well as many other types of properties.
And in terms of valuation, BKNG is currently trading at ~18.2x forward earnings, which is approximately in-line with the S&P 500 at ~18.4x. And of course, we believe Booking Holdings is a far better than average company. In regards to their balance sheet, the company is in a strong position, with $11.8B in cash and investments (including both short and long-term investments) and $8.5B of debt. The company also has $12.9B remaining on their share repurchase authorization, which management expects to complete over the next ~2-3 years, assuming stable business and market conditions. At the current market cap, this represents ~15% of shares outstanding.
As always, we thank you for your continued trust, and please let us know if you have any questions regarding Booking Holdings, or your broader portfolio.
Nicholas Coppola, CFA
Senior Portfolio Manager